Stablecoin Regulation Loophole to Allow Crypto Exchanges to Indirectly Pay Interest

Banking lobbies, including the American Bankers Association and the Consumer Bankers Association, have warned lawmakers about a "loophole" in stablecoin regulation that will allow crypto exchanges to indirectly pay interest to stablecoin holders. The Genius Act prohibits issuers from paying interest, but crypto exchanges can offer interest through third-party stablecoin issuers. Publicly traded companies in the space include Bank of America, Citi, Goldman Sachs, JPMorgan, Morgan Stanley, U.S. Bancorp, and Wells Fargo.

Banking lobbies, including the American Bankers Association and the Consumer Bankers Association, have raised concerns about a potential loophole in stablecoin regulation that could enable crypto exchanges to indirectly pay interest to stablecoin holders. The Genius Act, which prohibits issuers from paying interest, may inadvertently allow crypto exchanges to circumvent this restriction by offering interest through third-party stablecoin issuers.

The concern stems from the fact that while the Genius Act bans issuers from paying "yield" or interest to customers, it does not extend this restriction to crypto exchanges. This loophole could enable some crypto exchanges to indirectly offer interest and rewards to stablecoin holders, potentially draining funds from traditional banks.

Publicly traded companies in the space, such as Bank of America, Citi, Goldman Sachs, JPMorgan, Morgan Stanley, U.S. Bancorp, and Wells Fargo, are among those voicing these concerns. They argue that this loophole could lead to a significant outflow of funds from traditional banking systems, potentially reaching $6.6 trillion, as highlighted by a Citigroup report [1].

The banking groups have called for regulatory action to close this gap and prevent such a deposit outflow. However, the crypto industry has pushed back against these concerns, arguing that regulatory efforts to restrict stablecoin yields could unfairly favor traditional banks and hinder financial innovation.

Meanwhile, the U.S. government has shown support for dollar-pegged stablecoins, with Treasury Secretary Scott Bessent stating that stablecoins will increase demand for U.S. Treasuries and help maintain the dollar’s global dominance [2]. This stance underscores the strategic importance of stablecoins in international finance.

The debate over stablecoin yields raises important questions about the future of banking and monetary policy. As stablecoins become more prevalent, central banks may find it increasingly difficult to control liquidity and interest rates if a significant portion of bank deposits shifts to alternative financial instruments. This scenario could complicate efforts to manage inflation and economic growth.

The situation underscores the need for a balanced approach to regulation that encourages innovation while preserving financial stability. The potential outflow of $6.6 trillion highlights the urgency for both regulators and financial institutions to adapt to a rapidly changing financial ecosystem.

References:
[1] Citi Warns Stablecoin Yields Could Drain $6.6 Trillion From ... (https://www.ainvest.com/news/citi-warns-stablecoin-yields-drain-6-6-trillion-banks-2508/)
[2] Treasury Secretary Scott Bessent believes that stablecoins will increase demand for U.S. Treasuries. He has also highlighted that the GENIUS Act provides the regulatory clarity needed for the stablecoin market to grow into a multitrillion-dollar industry.