U.S. Bankers Urge Congress to Close GENIUS Act Stablecoin Yield Loophole

On Aug. 12, leading U.S. banking groups asked Congress to fix a GENIUS Act gap that lets stablecoin issuers route yield through affiliates or partners. The law bans issuers from paying interest, but it doesn’t clearly block third-party “yield” deals.

Why Banks Want the Yield Loophole Closed

Bank groups say the law is clear on one point: issuers cannot pay interest or yield to holders. But they warn that the law does not stop affiliated entities, exchanges, or brokers from offering yield tied to the same coins. That setup mimics deposits without bank rules. They want Congress to extend the ban to those affiliates and intermediaries.

Five associations led the push: the American Bankers Association, Bank Policy Institute, Consumer Bankers Association, Financial Services Forum, and Independent Community Bankers of America. They published a “close the loophole” brief and urged lawmakers to clarify the statute. The ABA also flagged the risk in its banking journal update.

Context matters. The GENIUS Act, adopted this summer, set the first federal framework for payment stablecoins. It barred issuer-paid yield and set reserve and oversight rules. But it left openings around third-party arrangements. Law firms reviewing the bill called out this exact gap.

The market is large and growing. Total stablecoin value was about $261B in July, a new high. Citi sees the sector reaching $1.6T by 2030, which would park huge sums in T-bills. That scale explains why banks care about deposit-like products outside bank rules.

Issuer economics show the stakes. Circle’s Q2 update highlighted big reserve income from T-bills, even as one-off costs drove a net loss. If affiliates could pass yield to retail, it would blur the line between coins and deposits. Bank groups want that line bright.

Policy momentum is ongoing. The Senate’s latest GENIUS draft already bans yield and tightens consumer safeguards. Full implementation will take years as agencies write rules. Banks want Congress to lock the door on affiliate yield before that process drags on.

What the Request Would Change

If Congress closes the gap, stablecoin issuers and allied platforms would struggle to market “rewards” that look like interest. Exchanges could still run promos, but anything tied to stablecoin balance or holding time might face a bright red line. That shifts the product mix back toward pure payments and away from “high-yield cash” pitches.

Banks frame the case around credit creation. They say deposit flight into yield-bearing coins would shrink the pool they lend from, lifting borrowing costs for households and firms. Reuters and the WSJ both described this fear after GENIUS passed: the risk that stablecoins siphon deposits and weaken bank lending.

Treasury’s TBAC decks give the math backdrop. They point to trillions in non-interest demand deposits that could move if stablecoin balances earn interest. That is why many regimes avoid interest on payment stablecoins. Policymakers try to keep stablecoins “on par” instruments, not savings products.

The ABA has also warned about “deposit substitution” from both CBDC and scaled stablecoins. In July, the ABA stressed that a larger stablecoin market could raise funding costs and complicate monetary transmission. That aligns with the bank coalition’s push.

On the other side, issuers argue that yields often come from partners, not the issuer, and can help bootstrap adoption. But a hard ban could push more value into fee-free payment features, wallet UX, and compliance tooling, not interest. It would also favor banks that can still pay interest on insured deposits.For Web3 builders, the compliance shape matters.

If affiliates cannot pay yield on stablecoin balances, DeFi integrations that wrap “rewards” around custodial balances may face extra scrutiny. Expect more focus on spending, settlement times, and gas abstraction – not advertised APYs.

What the GENIUS Act Actually Does

The law creates a federal framework for “payment stablecoins.” It defines who can issue, how reserves work, and which regulators supervise. Crucially, it bars permitted issuers from paying interest or yield to holders. It also sets timelines: the framework becomes effective on the earlier of 18 months after enactment or 120 days after final rules.

There’s a dual pathway. Issuers can be federally supervised or state-qualified under regimes deemed “substantially similar.” Smaller state issuers (under a $10B cap) can operate until they grow past the threshold, then transition or seek a waiver. This keeps room for nonbank innovation while setting prudential baselines.

The law clarifies bankruptcy treatment for reserves and aims to keep customer assets ring-fenced. It also tasks regulators with rulemaking on interoperability and foreign issuer access. The framework is wide, but details will come via agency rules over the next year.

Why the yield fight matters now: product design is being set today. Large banks, payment firms, and even retailers are weighing whether to issue their own coin or integrate USDC-like tokens. Their marketing playbooks often include rewards. If affiliates can pay “yield,” the ban becomes porous. If not, payments-only coins stay closer to digital cash.

Markets care because incentives change behavior. Rewards draw balances. If balances move out of banks and into tokens, deposit costs rise and lending shrinks at the margin. Supporters counter that stablecoins mostly recycle liquidity and help settle payments faster, with limited Main Street impact so far. Both claims hinge on how far rewards can go.

Outlook: Congress could clarify the statute or regulators could try to police “indirect” yield with guidance and enforcement. But a clean fix in law would reduce ambiguity and litigation risk. Expect hearings, draft text, and industry comment as agencies also finalize the first wave of GENIUS Act rules.