Community Bankers Urge Senate to Close Stablecoin Interest Loophole
Commentary by Andrew Lom
Members of the American Bankers Association’s Community Bankers Council urged the U.S. Senate to address regulatory loopholes that allow non-banks to bypass prohibitions on paying interest on stablecoins.
In a letter to all Senators, the bankers asserted that stablecoin issuers are indirectly funding payments to stablecoin holders through digital asset exchanges and other partners, effectively paying interest despite prohibitions intended to prevent such inducements. The bankers argued that this activity allows the exception to swallow the rule, creating market distortions that disadvantage institutions that follow the regulations. They warned that if customers are incentivized to move their savings from banks to stablecoins to chase yield, it could significantly disrupt the community-based lending that fuels the economy.
The bankers said that the Treasury estimated "$6.6 trillion in bank deposits are at risk" without a strict prohibition on these interest payments. They asserted that if billions of dollars are displaced from community banks, borrowers such as small businesses, farmers, students, and home buyers will suffer because crypto companies are not designed to fill that lending gap. Consequently, they urged the Senate to stand up for community banks by clarifying market structure legislation and requested that the prohibition on interest payments be explicitly applied to the affiliates and partners of stablecoin issuers to ensure the market develops without disintermediating the banking sector.
The bankers also highlighted that crypto exchanges cannot offer FDIC-insured products, a fact these companies omit from their aggressive advertising. They stated that while community banks are willing to innovate and embrace instant payments, new technology should not enable companies to avoid the supervision and regulation that banks must follow.
Commentary
The policy motivation in the GENIUS Act is certainly to prohibit yielding or interest-bearing stablecoins as such. Not every benefit derived from an asset is an investment return, and not every benefit derived from a deposit-like asset or store-of-value asset is interest. Think of cash back and other rewards programs. These certainly give asset owners value, and they often aren’t treated as interest payments. Of course, that doesn’t mean it’s a free-for-all. Benefits other than yield or interest that accrue to stablecoin holders may well be subject to other kinds of regulation that could put a brake on how competitive certain stablecoins truly are relative to bank products and services.