Regulators Grapple With Stablecoin Storm: Banks Fear $6.6T Exodus, Crypto Fights Back

Banks and financial institutions are calling for the repeal of key provisions in the GENIUS Act that govern stablecoin yields, warning that the current framework could undermine traditional banking systems and shift credit dynamics. The American Bankers Association (ABA) and other banking groups have raised concerns about a perceived loophole that allows stablecoin issuers or their affiliates to offer returns to users. This, they argue, could lead to a significant outflow of deposits from traditional banks, potentially draining up to $6.6 trillion from the sector and affecting credit availability for households and businesses [2]. The Bank Policy Institute (BPI), a prominent banking lobby, has also urged lawmakers to address this gap, emphasizing that the absence of strict restrictions on yield-bearing activities gives stablecoins an unfair competitive advantage [2].

The debate has drawn strong opposition from crypto industry groups. The Crypto Council for Innovation (CCI) and the Blockchain Association have responded with a joint letter to the Senate Banking Committee, rejecting the proposed amendments and calling them an attempt to re-litigate issues already settled in prior negotiations. These groups argue that stablecoins are not equivalent to bank deposits or investment products and therefore should not be held to the same regulatory standards. They also highlighted Section 16(d) of the GENIUS Act, which allows state-chartered institution subsidiaries to operate across state lines without additional licensing, as a key provision that prevents a fragmented regulatory environment [2]. According to the crypto advocates, removing this section would only exacerbate the existing barriers to innovation and interstate commerce.

The yield-bearing aspect of stablecoins has already shown economic impact, with payouts exceeding $800 million to holders in recent months. StableWatch data shows that Ethena Staked USDe (sUSDe) led the market in payouts over the last 30 days, distributing $30.71 million to users. Other notable yield-bearing stablecoins include BUIDL and staked USDe from the Sky Ecosystem, with payouts of $8.39 million and $6.78 million, respectively. These figures highlight the growing financial appeal of stablecoins, particularly in the decentralized finance (DeFi) space, where they serve as a bridge between traditional finance and emerging digital ecosystems [2].

Meanwhile, the Treasury Department has taken a step toward further shaping the regulatory landscape by issuing a Request for Comment under the GENIUS Act. The notice, published on August 18, 2025, seeks public input on the use of innovative tools—such as artificial intelligence, blockchain monitoring, and digital identity verification—to detect illicit activity involving stablecoins. The department emphasized that these tools are essential for addressing risks in digital finance but cautioned that they could also place new burdens on financial institutions. Comments are due by October 17, and the Treasury will use the feedback to inform research on the effectiveness, costs, and privacy implications of the proposed technologies [1].

The broader market context remains critical to understanding the implications of these developments. With a total stablecoin market cap of $288 billion, the sector remains a small fraction of the U.S. dollar money supply, which the Federal Reserve reported at $22 trillion as of June 2025. However, the rapid expansion of yield-bearing stablecoins and their increasing integration into financial services suggests that the sector is gaining traction and influencing traditional banking dynamics more than previously anticipated. As the debate over regulatory alignment continues, the industry and policymakers must balance innovation with systemic risk mitigation.

Wyoming has also made a significant move in the stablecoin landscape by launching its state-issued stablecoin, the Frontier Stable Token (FRNT), backed by U.S. dollars and short-term Treasuries. This initiative, developed in partnership with LayerZero and managed by Franklin Advisers, marks the first time a U.S. state has issued its own stablecoin. The token is designed to track the U.S. dollar one-for-one and will be available on multiple blockchain networks, including Ethereum, Arbitrum, and Solana. While the GENIUS Act imposes 100% reserve requirements for private issuers, state-issued stablecoins appear to fall outside the scope of its oversight, raising questions about the uniformity of the regulatory framework and the potential for further expansion into the stablecoin market by other states [4].

Source:

[1] Treasury Issues Request for Comment Related to the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act (https://home.treasury.gov/news/press-releases/sb0228)

[2] Crypto Groups Push Back on Bank Lobby Over GENIUS Act (https://cointelegraph.com/news/crypto-groups-reject-bank-lobby-stablecoin-genius-act)

[3] The GENIUS Act: What Stablecoin Issuers Need to Know (https://kr.law/news/article-detail/the-genius-act-what-stablecoin-issuers-need-to-know)

[4] Wyoming Becomes the First to Launch a State-Issued ... (https://www.bloomberg.com/news/articles/2025-08-19/wyoming-becomes-the-first-to-launch-a-state-issued-stablecoin)