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Community banks are urging Congress to close a loophole in recently passed stablecoin legislation that they say allows crypto exchanges to pay interest-like rewards to token holders, potentially putting $6.6 trillion in U.S. bank deposits at risk.
The American Bankers Association warned lawmakers Monday that the GENIUS Act’s ban on direct interest payments is being circumvented through third-party reward programs offered by exchanges like Coinbase and Kraken.
The GENIUS Act prohibits stablecoin issuers from paying interest or yield directly to token holders. Lawmakers framed the restriction as a safeguard to prevent digital assets from competing with federally insured savings accounts.
However, community bankers say the Genius act loophole allows issuers to bypass the restriction by partnering with crypto exchanges that offer rewards funded indirectly by stablecoin issuers.
According to the GENIUS Act text filed with Congress, the prohibition applies to issuers but does not explicitly cover third-party reward mechanisms facilitated through exchanges.
The ABA Community Bankers Council says this gap has enabled certain firms to replicate interest-like incentives without violating the letter of the law.
“The legislation was a meaningful step toward regulating stablecoins, but it was not perfect from a community bank perspective,” the council wrote in its submission to lawmakers. The group added that the Genius act loophole undermines congressional efforts to preserve deposit stability and community-based lending.
The council also cited concerns raised by the Bank Policy Institute’s analysis on deposit flight risk, which warned that deposit outflows could intensify during periods of financial stress if stablecoins function as de facto yield-bearing alternatives.
Community bankers argue that closing the Genius act loophole is critical to preserving their ability to lend. Reduced deposits, they say, translate directly into less credit for households and small businesses that rely on relationship banking.
The U.S. Treasury has estimated that as much as $6.6 trillion in bank deposits could be at risk if stablecoin incentives expand unchecked.
ABA members warned that the Genius act loophole could amplify this exposure by encouraging customers to park idle funds in stablecoins rather than insured accounts.
“The result will be higher interest rates, fewer loans, and increased costs for businesses,” the Bank Policy Institute wrote, noting that community banks are particularly vulnerable to deposit volatility.
More than 200 community bank leaders signed the ABA letter, arguing that crypto exchanges and stablecoin issuers are not structured to replace banks’ lending function.
They also stressed that stablecoin platforms do not offer Federal Deposit Insurance Corporation protections, leaving consumers exposed in the event of a failure.
Crypto firms and trade groups have rejected the characterization of the Genius act loophole as a regulatory failure. Paul Grewal, chief legal officer of Coinbase, dismissed the banking industry’s claims in a public response.
“This was no loophole, and you know it. 376 Democrats and Republicans in the House and Senate rejected your unrestrained effort to avoid competition. So did one President. It’s time to move on,” said Grewal, Chief Legal Officer, Coinbase.
Some exchanges, including Coinbase and Kraken, currently offer reward programs linked to stablecoin holdings. Industry advocates argue these programs are designed to support payments and liquidity, not lending.
In a joint letter to the Senate Banking Committee, the Crypto Council for Innovation and the Blockchain Association said stablecoin payments are not intended to fund loans and warned that altering the Genius act loophole would reduce consumer choice and slow financial innovation.
While debate over the Genius act loophole continues, regulators have begun implementing the law. On December 16, the FDIC Board approved application procedures for banks seeking to issue stablecoins under the GENIUS Act.
According to the FDIC’s official approval notice on stablecoin applications, regulatory-approved U.S. banks may issue stablecoins through subsidiaries, subject to formal application and supervisory review.
The agency said it is required to receive applications, assess compliance, and issue implementing regulations governing stablecoin issuance.
The FDIC also warned that illicit actors could still exploit digital assets through unhosted or offshore wallets, reinforcing the need for coordinated oversight beyond closing the Genius act loophole.
As lawmakers consider revisions, the dispute highlights a broader tension between financial stability and innovation.
Whether Congress moves to explicitly close the Genius act loophole may shape the future of stablecoin adoption and the role of community banks in the digital payments economy.
