While Congress patted itself on the back for crafting legislation that would supposedly rein in stablecoin issuers‘ ability to compete directly with traditional bank deposits, the GENIUS Act appears to have left a regulatory gap so wide that a $280 billion stablecoin market could comfortably drive through it sideways.
The loophole operates with breathtaking simplicity: while stablecoin issuers cannot directly offer yields to token holders, the Act conveniently forgot to mention crypto exchanges or affiliated entities. This oversight (charitable interpretation) or deliberate omission (less charitable but possibly accurate) allows platforms like Coinbase and Kraken to offer interest-like returns to USDC holders, effectively recreating the very mechanism Congress sought to eliminate.
Congress banned direct stablecoin yields but forgot exchanges—creating a regulatory loophole that recreates the exact problem it aimed to solve.
Banking groups are understandably apoplectic. The Bank Policy Institute and American Bankers Association have formally urged Congress to close this regulatory Swiss cheese, warning of potential $6.6 trillion deposit outflows from traditional banks. That figure represents roughly one-third of total U.S. bank deposits—a migration that would fundamentally reshape American finance.
The mechanics are straightforward but devastating: when deposits flee banks for yield-bearing stablecoins, lending capacity contracts proportionally. Banks fund loans through deposits, so fewer deposits mean tighter credit, higher borrowing costs, and reduced economic activity. It’s monetary plumbing 101, yet somehow escaped legislative consideration.
Current stablecoin market capitalization of $280 billion already poses competitive pressure, but projections suggest growth to $2 trillion by 2028. At that scale, the loophole transforms from regulatory inconvenience to systemic threat, particularly during stress scenarios when flight-to-yield accelerates. Beyond simple competition, these programmable finance capabilities introduce entirely new mechanisms that traditional banks cannot replicate through conventional account structures. The resulting credit creation disruption could undermine the traditional lending framework that supports Main Street businesses and households. These stablecoins also enable cross-border transactions with greater efficiency than traditional banking systems, further intensifying competitive pressures on established financial institutions.
The irony is exquisite: legislation designed to protect traditional banking inadvertently created mechanisms for its potential dismantling. Stablecoin issuers, barred from direct yield payments, simply partnered with exchanges to achieve identical outcomes through affiliate structures. The result replicates prohibited practices while maintaining technical compliance.
Regulatory response appears imminent, with banking groups expecting guidance addressing indirect yield offerings. Without swift action, the GENIUS Act risks becoming a textbook example of regulatory arbitrage—where well-intentioned legislation creates unintended consequences more problematic than the original issues it sought to address.
The banking industry’s demand for fixes reflects not protectionism but genuine concern over financial stability implications of poorly crafted regulatory frameworks.
