GENIUS Act Loophole Risks Shifting $6.6 Trillion From Banks to Crypto

A recent development in U.S. financial regulation has sparked concerns over a potential shift of trillions of dollars from traditional banks to the crypto market, due to a loophole in the newly passed GENIUS Act. The act, intended to regulate stablecoins, prohibits stablecoin issuers from directly offering interest or yield to users. However, it does not prevent crypto exchanges from providing such benefits indirectly on third-party-issued stablecoins, creating a regulatory disparity [2].

This gap in the law has alarmed major banking industry groups, including the American Bankers Association, the Bank Policy Institute, and the Consumer Bankers Association. These organizations argue that the structure creates an uneven playing field, potentially encouraging customers to shift their deposits from banks to stablecoins held on crypto exchanges [3]. If exploited, the loophole could destabilize bank liquidity, increase credit supply constraints, and raise borrowing costs for households and businesses [4].

Under the current framework, banks are allowed to issue their own stablecoins but are not permitted to offer interest on them. In contrast, crypto exchanges can provide yield to users on stablecoins issued by companies like Circle and Tether through indirect mechanisms. This discrepancy raises the risk of deposit outflows from traditional banks, reminiscent of the 1980s savings and loan crisis, according to a Citi executive [5].

The U.S. Treasury previously estimated that stablecoins could potentially pull up to $6.6 trillion in deposits away from banks, further intensifying concerns about credit availability and financial stability [4]. The American Bankers Association and related groups are actively lobbying for legislative amendments to close this perceived loophole. They warn that it threatens the broader credit creation mechanism and could undermine the stability of the financial system [4].

Conversely, some crypto industry representatives have defended the current structure, arguing that it reflects a deliberate legislative choice to promote competition. Coinbase’s chief legal officer, for example, has stated that banks should accept the outcome of the democratic process [2]. Meanwhile, banks are also positioning themselves to enter the stablecoin custody space, aiming to secure a role in the emerging digital financial ecosystem and avoid a repeat of the FinTech era [3].

As the debate intensifies, U.S. banking groups are pushing for legislative amendments to the GENIUS Act, urging lawmakers to address the unintended consequences of the current framework. The outcome of these efforts could shape the future of stablecoins and their impact on traditional banking systems.

Source:

[1] AMBCrypto, https://ambcrypto.com/how-a-genius-act-loophole-could-shift-billions-from-banks-to-crypto/

[2] PYMNTS.com, https://www.pymnts.com/news/banking/2025/banking-sector-campaigns-against-loophole-in-stablecoin-law/

[3] CoinCentral, https://coincentral.com/banks-push-to-amend-genius-act-warn-of-stablecoin-yield-risks/

[4] Yahoo Finance, https://finance.yahoo.com/news/citi-executive-warns-stablecoin-interest-202759337.html

[5] ForkLog, https://forklog.com/en/citi-warns-of-stablecoin-threat-to-banks/