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The banking industry is pushing for a legislative fix to the GENIUS Act, a law that established the first federal framework for stablecoins, a form of digital token that represents a fixed amount of a fiat currency, such as the U.S. dollar. While the GENIUS Act prohibits stablecoin issuers from directly paying interest to holders, firms including Coinbase and Circle have circumvented this restriction by offering “rewards” programs. In these arrangements, customers lend their stablecoins to a cryptocurrency platform, which then generates yield for the customers. Banks argue this is functionally identical to interest, and are asking Congress to close what they call a dangerous regulatory loophole by explicitly banning firms from offering such rewards to customers.
Banks say these interest-bearing stablecoins pose a serious risk to the economy. They argue that, unlike bank deposits, which are protected by FDIC insurance, stablecoin holdings have no such government backstop, exposing consumers to greater risk. Banks also argue that a significant shift of funds away from traditional, insured deposits, which are the primary source of funding for bank lending, could reduce the availability of everything from home mortgages to small-business loans, slowing the broader economy. The Treasury Department has amplified this concern, estimating potential deposit outflows of up to $6.6 trillion if stablecoins are permitted to offer competitive yields. The crypto industry counters that this is fearmongering by the banking industry, claiming that allowing rewards simply introduces much-needed competition that will pressure banks to provide more competitive interest rates to customers who have earned little on their savings for over a decade.
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At least for now, Congress is siding with the cryptocurrency industry. Lawmakers from both sides of the aisle seem reluctant to pass a narrow fix for the GENIUS Act, fearing it could stifle innovation in a fast-growing sector. Some key Senate Banking Committee members have signaled they’re open to addressing the issue but prefer to do so within a more comprehensive crypto bill, such as the Digital Asset Market Clarity Act. Such a bill would establish rules for market structure, consumer protection and the roles of various regulators. Proponents of the comprehensive approach argue that a holistic framework is necessary to provide long-term clarity for the industry, rather than engaging in a legislative game of “whack-a-mole” with every new product. They believe that narrowly targeting rewards could stifle innovation and push digital asset companies offshore, undermining U.S. leadership in financial technology.
For now, the outcome of this fight is hard to predict, given that both sides are intensely lobbying lawmakers. The stakes are high for both sides, as banks aim to maintain their traditional role in taking deposits from customers and making loans to households and businesses, while stablecoin issuers seek to gain a foothold in the financial sector.
This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.
