Banks Warn of Systemic Risk as Crypto Giants Expand Stablecoin Rewards

Coinbase CEO Brian Armstrong has publicly criticized banks for lobbying to restrict stablecoin rewards, calling their efforts a "boogeyman" tactic to protect their financial interests. The dispute centers on whether crypto exchanges can offer incentives for holding stablecoins, a practice currently permitted under the GENIUS Act but opposed by banking groups. Armstrong argued that banks are seeking to eliminate competition by framing stablecoin rewards as a threat to the broader financial system, despite the fact that the legislation already establishes a regulatory framework for such incentives Coinbase CEO Brian Armstrong on stablecoin rewards^[1].

The GENIUS Act, which took effect in July 2025, prohibits stablecoin issuers from offering interest or yield on token holdings but explicitly allows platforms to provide "rewards" through their own mechanisms. Coinbase and PayPal have leveraged this distinction by structuring their programs as platform-based incentives rather than issuer-driven interest. For instance, Coinbase offers a 4.1% annual reward on USDC, while PayPal provides 3.7% on PYUSD. Both platforms emphasize that they act as distributors, not issuers, of the stablecoins they reward, thereby sidestepping direct restrictions under the law The Coinomist on Coinbase and PayPal's stablecoin yield workarounds^[2].

Banking advocates, including the Bank Policy Institute, warn that allowing stablecoin rewards could trigger a mass exodus of deposits from community banks, undermining their ability to fund economic growth. A Treasury report estimates that up to $6.6 trillion could shift from traditional bank deposits to stablecoins if rewards remain unregulated. John Court of the Bank Policy Institute argued that such a shift would "neuter the ability of banks to lend into the real economy," creating systemic risks if stablecoins are perceived as a substitute for traditional savings accounts Bank Policy Institute's concerns over stablecoin competition^[3].

Armstrong dismissed these concerns, stating that banks are attempting to shield their $180 billion in profits from payment services rather than addressing genuine regulatory gaps. He emphasized that the GENIUS Act already resolved the issue of stablecoin rewards through its compromise language, and reopening the debate would unfairly tilt the market in favor of legacy institutions. "This is something that big banks are funding behind the scenes," Armstrong told CNBC, noting that smaller banks are not the primary beneficiaries of the lobbying efforts CNBC interview with Brian Armstrong on bank lobbying^[4].

Regulatory clarity remains a key challenge as lawmakers finalize the Digital Asset Market Structure and Investor Protection Act. While Sen. Cynthia Lummis (R-Wyo.) asserted that the issue was "heavily litigated" in the GENIUS Act and should not be revisited, industry stakeholders continue to push for a level playing field. Crypto groups argue that banning rewards would deprive consumers of competitive returns and stifle innovation, while banks insist that the distinction between "rewards" and "interest" is a technical loophole that could destabilize the financial system. The outcome of these debates may determine whether stablecoin rewards become a permanent fixture in the evolving crypto ecosystem Senate negotiations on digital asset legislation^[5].