US banking groups are raising a significant alarm. They urge Congress to address a critical loophole within the recently enacted GENIUS Act. This loophole, they contend, could allow stablecoin issuers to offer substantial stablecoin yield through affiliated entities. The banking sector fears this practice could severely undermine the traditional financial system, potentially triggering massive deposit outflows from banks.
The GENIUS Act and the Stablecoin Yield Loophole
The GENIUS Act, signed into law on July 18, aims to regulate stablecoins. It explicitly prohibits stablecoin issuers from offering interest or yield directly to token holders. However, a crucial omission exists. The law does not extend this ban to crypto exchanges or other affiliated businesses. Consequently, issuers might circumvent the prohibition by offering stablecoin yield through these partners.
The Bank Policy Institute (BPI), leading several US banking groups, sent a letter to Congress. They warned that failing to close this loophole could disrupt the flow of credit. This disruption, they claim, would impact American businesses and families. The BPI highlighted the potential for significant financial instability.
Billions at Risk: Banking System Concerns Over Stablecoin Yield
Banking groups express deep concern that widespread adoption of yield-bearing stablecoins could undermine the banking system. Traditional banks rely on attracting deposits with competitive interest savings products. These deposits, in turn, back the loans banks make to individuals and businesses. The BPI specifically cited a US Treasury report from April. This report suggested that allowing interest or yield on stablecoins could lead to a staggering $6.6 trillion in deposit outflows from the traditional banking system.
Such a massive shift could pose a serious risk to America’s credit system. Furthermore, BPI stated, “The result will be greater deposit flight risk, especially in times of stress, that will undermine credit creation throughout the economy.” They added, “The corresponding reduction in credit supply means higher interest rates, fewer loans, and increased costs for Main Street businesses and households.” This underscores the gravity of their concerns regarding stablecoin yield.
Distinguishing Stablecoins from Traditional Deposits
In their letter, signed by prominent groups like the American Bankers Association, bankers argued a fundamental difference exists. They stated that stablecoins are distinct from bank deposits and money market funds. Banks and money market funds fund loans or invest in securities to offer yield. Stablecoins, conversely, do not perform these functions.
The BPI emphasized, “These distinctions are why payment stablecoins should not pay interest the way highly regulated and supervised banks do on deposits or offer yield as money market funds do.” This core argument forms the basis of their opposition to any form of stablecoin yield.
The Expanding Stablecoin Market Landscape
Currently, the total market capitalization of stablecoins stands at approximately $280.2 billion. This figure represents a fraction of the broader US dollar money supply. The Federal Reserve reported the US dollar money supply at $22 trillion at the end of June. However, the stablecoin market is growing rapidly.
CoinGecko data indicates that Tether (USDT) and Circle’s USDC (USDC) dominate this market. Their market caps are $165 billion and $66.4 billion, respectively. Despite its current size, the US Treasury expects the stablecoin market to expand significantly. Projections indicate it could reach $2 trillion by 2028. This anticipated growth amplifies the concerns regarding unregulated stablecoin yield offerings.
GENIUS Act’s Dual Impact: Regulation and Dollar Dominance
US President Donald Trump signed the GENIUS Act into law on July 18. Many crypto industry analysts believe this legislation will bolster US dollar dominance. It promotes stablecoins pegged to the dollar, aiming to rival other currencies. This move also reinforces the dollar’s role as the world’s leading reserve currency.
The Act’s intent to strengthen the dollar, however, clashes with the banking groups’ current fears. The perceived loophole allowing indirect stablecoin yield could inadvertently create systemic risks. This ongoing debate highlights the complex challenges of integrating novel financial technologies into existing regulatory frameworks. Policymakers face the difficult task of fostering innovation while safeguarding financial stability.
Ultimately, the call from US banking groups underscores a critical regulatory challenge. Lawmakers must decide whether to close the perceived stablecoin yield loophole. Their decision will significantly impact both the future of digital assets and the stability of the traditional banking system. The financial landscape continues to evolve rapidly, necessitating careful and adaptive legislative responses.
Frequently Asked Questions (FAQs)
What is the GENIUS Act?
The GENIUS Act is a US law signed on July 18, 2024. It aims to regulate stablecoins, specifically prohibiting stablecoin issuers from directly offering interest or yield to token holders. Its broader goal is to promote US dollar-pegged stablecoins and reinforce the dollar’s global dominance.
What is the stablecoin yield “loophole”?
The “loophole” refers to a perceived gap in the GENIUS Act. While the Act bans stablecoin issuers from directly offering yield, it does not explicitly extend this prohibition to their affiliated entities, such as crypto exchanges. This could allow issuers to offer stablecoin yield indirectly through these partners, circumventing the law’s intent.
Why are US banking groups concerned about stablecoin yield?
US banking groups, led by the Bank Policy Institute, fear that widespread adoption of yield-bearing stablecoins could lead to significant deposit outflows from traditional banks, potentially up to $6.6 trillion. They argue this would undermine the banking system’s ability to fund loans, disrupt credit flow to businesses and families, and increase financial instability.
How large is the stablecoin market compared to the US money supply?
The total market capitalization of stablecoins is approximately $280.2 billion. This is a small fraction compared to the US dollar money supply, which the Federal Reserve reported as $22 trillion at the end of June. However, the stablecoin market is projected to grow substantially, potentially reaching $2 trillion by 2028.
What is the primary difference between bank deposits and stablecoins regarding yield?
Banking groups argue that bank deposits and money market funds fund loans or invest in securities to generate yield, contributing to credit creation. Stablecoins, conversely, do not perform these functions. Therefore, bankers contend that stablecoins should not pay interest or yield in the same manner as highly regulated traditional financial products.
