Stablecoin Showdown: Banks Battle for Regulatory Ground

The U.S. Treasury has issued a Request for Comment under the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, signaling continued efforts to establish a comprehensive regulatory framework for stablecoin issuers in the United States. This step, required under Section 9(a) of the legislation, aligns with the administration’s broader strategy to support responsible innovation in digital assets, as outlined in Executive Order 14178 on digital financial technology. The request, published in the Federal Register, invites public feedback on innovative methods used or potentially used by regulated institutions to detect illicit activity involving digital assets, with a particular focus on AI, blockchain, and identity verification tools [1]. The public has 60 days to submit comments, which will inform future research into the effectiveness, costs, and risks associated with these technologies [6].

Meanwhile, the U.S. banking lobby has begun to mobilize against certain provisions of the GENIUS Act, particularly those related to interest-bearing stablecoins. The Bank Policy Institute (BPI), led by JPMorgan CEO Jamie Dimon, has expressed concerns that allowing stablecoin issuers to offer interest could threaten traditional banking models by diverting deposits from banks. According to the BPI, this shift could lead to higher lending costs and reduced credit availability for businesses and households. The institute has called for amendments to close perceived loopholes in the law, particularly in Section 4(a)(11), which currently prohibits stablecoin issuers from offering interest on their holdings. Critics argue that the law’s language does not fully prevent indirect arrangements between exchanges and stablecoin issuers from yielding returns [3].

The American Bankers Association and state banking associations have also joined the call for revisions, urging Senate Banking Committee leaders to address what they describe as regulatory gaps in the GENIUS Act. These groups emphasize the importance of maintaining a robust federal-state regulatory balance, particularly in light of Section 16(d), which allows certain state-chartered banks to offer custody and money transmission services under federal supervision, bypassing state-level oversight. This provision has drawn criticism for potentially undermining state regulatory authority and creating a risk of unregulated “shadow banking” [4].

Supporters of the law, including the crypto industry, argue that the GENIUS Act already represents a significant concession to the banking lobby. The law mandates reserve requirements for stablecoin issuers and establishes a federal framework for oversight, which many see as a compromise between innovation and consumer protection. Critics of the banking lobby’s push for further amendments, including Coinbase’s Chief Policy Officer, suggest that the $6.6 trillion estimate of potential bank deposit outflows is inflated and based on industry self-interest rather than empirical evidence. They highlight that stablecoin adoption has not historically led to significant deposit outflows at community banks, questioning the validity of the banking industry’s concerns [4].

The debate over the GENIUS Act reflects a broader tension in Washington between financial institutions and emerging digital asset markets. With the crypto industry now possessing significant lobbying power, it remains uncertain whether the law will undergo further changes. Some analysts argue that the banking lobby may be fighting a losing battle, as stablecoin adoption continues to rise and financial consumers increasingly seek alternatives to traditional banking products. While banks retain considerable influence in shaping regulatory outcomes, the digital finance landscape is evolving rapidly, and the crypto industry has demonstrated its ability to advocate for its interests effectively. The next few months will likely see continued legislative activity as lawmakers consider broader market structure reforms, and the outcome could have far-reaching implications for both the banking sector and the digital asset ecosystem [3].

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] Banking Associations Push to Close GENIUS Act Loopholes (https://www.regulationtomorrow.com/us/banking-associations-push-to-close-genius-act-loopholes/)

[3] Banking lobby fights to change GENIUS Act: Is it too late? (https://cointelegraph.com/news/banking-lobby-change-genius-act)

[4] GENIUS Gripes: State Preemption and Stablecoin Loopholes (https://www.cryptoinamerica.com/p/genius-gripes-state-preemption-and)

[5] Treasury Issues Request for Comment Related to the ... (https://www.fincen.gov/news/news-releases/treasury-issues-request-comment-related-guiding-and-establishing-national)

[6] Treasury Solicits Comments on Genius Act | Stinson (https://www.jdsupra.com/legalnews/treasury-solicits-comments-on-genius-act-6304086/)