Why US community banks say the GENIUS Act has a stablecoin loophole

Key takeaways

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

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

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

• Banks also note that reward programs can be funded through platform revenues or affiliate structures, making the ban ineffective in practice if partner incentives continue.

In the US, the GENIUS Act of 2025 was intended to provide a federal framework for payment stablecoins. The law established strict standards for reserves and consumer protection. However, the banking sector soon warned Congress of a potential loophole in the stablecoin rules.

This article examines what the GENIUS Act was designed to achieve and the regulatory gap that bankers are concerned about. It explains why community banks are more affected than larger institutions, outlines counterarguments from the crypto industry and explores the options available to Congress.

What the Genius Act was trying to prevent

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

Banks supported restrictions on yield-bearing 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 move funds out of traditional bank accounts. Banks also warned that the impact would fall most heavily on smaller community banks, which rely on local deposits to fund lending.

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

The “loophole” banks are talking about

Community banks say the issue 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 urged 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 can enable rewards for stablecoin holders even when the issuer itself is not paying interest.

This structural feature of how stablecoins operate has highlighted the regulatory gap. The GENIUS Act restricts issuer-paid yield but does not necessarily prevent third-party platforms from incentivizing customers on deposited stablecoins.

Banks argue that because distribution partners can effectively work around the restriction, the act becomes less effective in practice.

• The issuer does not pay a yield.

• The platform holding the stablecoin balance pays rewards to the depositor.

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

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

Why community banks care more than large banks

Large banks can diversify funding sources and access wholesale funding markets more easily than smaller lenders. Community banks, on the other hand, are typically more dependent on stable retail deposits.

This is why community bankers frame the loophole debate as a local credit issue. If deposits move from community institutions into stablecoin balances, banks could have less capacity to lend to small businesses, farmers, students and homebuyers.

Banks have attempted to quantify this risk. The Banking Policy Institute (BPI) has argued that incentivizing a shift from deposits and money market funds to stablecoins could raise lending costs and reduce credit availability. The BPI has 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 mix of platform revenues, marketing subsidies, revenue-sharing arrangements or affiliate structures tied to stablecoin issuance and distribution.

While funding mechanics vary by platform and token, the controversy is less about any single program and more about the incentive outcome. Banks are concerned that stablecoins could offer bank customers an alternative venue for holding liquid funds.

Community banks are calling on Congress to close the loophole not only for issuers but also for affiliates, partners and intermediaries that deliver yield in practice.

Did you know? Stablecoin transaction volumes often spike during weekends and holidays, when banks are closed. This highlights how crypto payment rails operate continuously outside normal banking hours.

The crypto industry’s counterargument

Crypto advocacy groups and industry associations have pushed back strongly. The Blockchain Association and the Crypto Council for Innovation argue that Congress intentionally drew a clear line by banning issuer-paid interest while preserving room for platforms to offer lawful rewards and incentives.

Counterarguments from the crypto industry 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 fund loans like banks: Comparing stablecoins to deposit-funded lending is a category error. Industry groups argue that forcing stablecoins to mimic bank 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 experimentation in payments.

What could be the likely policy options?

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

• Affiliate and partner prohibition: Extend the GENIUS Act’s yield ban to issuer affiliates and distribution partners.

• Disclosure and consumer protection approach: Allow rewards but require clear disclosures. Crypto firms 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-like interest.

• A narrow safe harbor: Permit 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 shape whether stablecoins remain payments-first tools or potentially evolve into more bank-like stores of value.