What the GENIUS Act Was Meant to Stop—and the Stablecoin Loophole Banks See

Key takeaways

• The GENIUS Act was designed to keep stablecoins as payment tools rather than savings products. As a result, it prohibits issuers from paying interest or returns to stablecoin holders.

• Community banks argue that a loophole exists because exchanges and affiliate partners can still offer rewards on stablecoin balances, even if the issuer itself does not pay the yield.

• Smaller banks are more worried than larger ones because they rely heavily on local deposits. Any outflow of deposits could directly reduce lending to small businesses and households.

• Banks also note that rewards programs can be funded through platform revenue or affiliate structures, making the ban effectively ineffective if partner incentives continue.

In the US, the GENIUS Act of 2025 aimed to provide a federal framework for payment stablecoins. The law established strict rules for reservations and consumer protection. However, the banking sector soon warned Congress about a possible loophole in the stablecoin rules.

This article examines what the GENIUS Act was designed to do and the regulatory gap that worries bankers. Explains why community banks are being hit harder than larger institutions, outlines the crypto industry’s counterarguments, and explores the options available to Congress.

What the Genius Act was trying to prevent

The GENIUS Act was intended to prevent stablecoins from functioning as savings products. Lawmakers wanted stablecoins to continue functioning as payment instruments. For this reason, the law prohibits stablecoin issuers from paying interest or returns to holders solely for holding the token.

Banks supported restrictions on yield-generating stablecoins. They argued that if stablecoins could pay yield directly, they could become an alternative to insured savings accounts. This could encourage some depositors to withdraw funds from traditional bank accounts. Banks also warned that the impact would fall hardest on smaller community banks, which rely on local deposits to fund loans.

Did you know? Some US states already regulate money transmitters that handle stablecoins. As a result, a single stablecoin platform may face both the federal requirements of the GENIUS Act and dozens of separate state licensing and reporting obligations.

The “legal loophole” that banks talk about

Community banks say the problem is not what stablecoin issuers do directly. Instead, they argue that the loophole arises through issuers’ distribution partners, including exchanges and other crypto platforms.

In early January 2026, the American Bankers Association’s Community Bankers Council addressed the Senate to tighten the GENIUS framework, warning that some stablecoin ecosystems were exploring a perceived “loophole.” According to the group, exchanges and other partners may allow rewards for stablecoin holders even when the issuer itself does not pay interest.

This structural feature of the functioning of stablecoins has highlighted the regulatory gap. The GENIUS Act restricts the yield paid by the issuer, but does not necessarily prevent third-party platforms from encouraging customers with deposited stablecoins.

The banks argue that because distribution partners can effectively circumvent the restriction, the law becomes less effective in practice.

• The issuer does not pay yield.

• The platform that holds the stablecoin balance pays rewards to the depositor.

• From the customer’s perspective, they earn returns by simply holding stablecoins.

Did you know? Several US stablecoin issuers hold reserves primarily in short-term US Treasury bills. This makes them indirect participants in public debt markets rather than in traditional banking systems.

Why Community Banks Care More Than Big Banks

Large banks can diversify their funding sources and access wholesale funding markets more easily than smaller lenders. Community banks, on the other hand, tend to rely more on stable retail deposits.

This is why community bankers frame the loophole debate as a local credit issue. If deposits shift from community institutions to stablecoin balances, banks could be less able to lend to small businesses, farmers, students and home buyers.

Banks have attempted to quantify this risk. The Banking Policy Institute (BPI) has argued that incentivizing a shift of deposits and money market funds to stablecoins could increase borrowing costs and reduce the availability of credit. The BIS also warned that these incentives undermine the spirit of the ban on issuer-paid yield for stablecoins.

How rewards can be offered without the issuer paying interest

Banks argue that these programs can be funded through a combination of platform revenues, marketing subsidies, revenue-sharing agreements, or affiliate structures tied to the issuance and distribution of stablecoins.

While funding mechanisms vary by platform and token, the controversy focuses less on a particular program and more on the outcome of the incentive. Banks are concerned that stablecoins could offer bank customers an alternative place to hold liquid funds.

Community banks are asking Congress to close the loophole not only for issuers but also for affiliates, partners and intermediaries who generate returns in practice.

Did you know? Stablecoin transaction volumes typically increase during weekends and holidays, when banks are closed. This highlights how crypto payment avenues continually operate outside of normal banking hours.

The Crypto Industry Counterargument

Cryptocurrency advocacy groups and industry associations have strongly objected. The Blockchain Association and the Crypto Council for Innovation argue that Congress intentionally drew a bright line by prohibiting issuer-paid interest while preserving room for platforms to offer legal rewards and incentives.

Crypto industry counterarguments include:

• Payment stablecoins are not bank deposits: Stablecoins are primarily payment and settlement tools and should not be regulated as substitutes for deposits.

• Stablecoins do not finance loans like banks: Comparing stablecoins to deposit-funded loans is a category mistake. Industry groups argue that forcing stablecoins to mimic banking economics would suppress competition rather than protect consumers.

• Banning third-party rewards could stifle innovation: Treating every incentive program as a prohibited activity could reduce consumer choice and limit payment experimentation.

What could be the possible political options?

Based on public arguments so far, policymakers have several possible paths:

• Prohibition of affiliates and partners: Expand the GENIUS Act’s performance ban to issuing affiliates and distribution partners.

• Disclosure and consumer protection approach: Allow rewards but require clear information. Cryptocurrency companies could be required to explain who pays the rewards, what risks are involved, and what is not insured. Regulators could also impose stricter marketing rules to prevent rewards from being presented as bank interest.

• A narrow and safe port: Allow certain activity-based incentives. For example, the law could allow rewards tied to usage while limiting balance-based incentives that resemble interest.

How Congress resolves this issue will determine whether stablecoins remain payments-first tools or potentially evolve into more bank-like stores of value.