Bank lobbyists are pushing lawmakers to ban 'loophole' in stablecoin law
A bank lobbyist group is increasing pressure on the US Senate to ban what it calls a "loophole" that crypto companies are exploiting in the GENIUS Act's stablecoin law.
Because the GENIUS Act prohibits stablecoin issuers from offering interest on the assets, crypto companies are instead offering investors “rewards” on their stablecoin holdings.
Coinbase (COIN), for instance, offers its customers 4.10% rewards for holding Circle Internet Group’s (CRCL) USDC stablecoin.
But the banking sector has fought to end this practice of offering rewards, with lobbying groups like the Bank Policy Institute calling it an “interest loophole” that the crypto industry is attempting to use to get around the prohibition in the legislation.
And now more than 100 community bank leaders from across the US, who are members of the American Bankers Association (ABA) Community Bankers Council, have sent a letter to the Senate, calling on Congress to disallow the practice of offering rewards.
The letter cites US Treasury data that claims more than $6.6 trillion bank deposits are "at risk" because "allowing inducements like interest payments, yield, or rewards could incentivize customers to park their savings not in a bank, but in stablecoins."
The letter argues that "some companies have exploited a perceived loophole allowing stablecoin issuers to indirectly fund payments to stablecoin holders through digital asset exchanges and other partners," which creates a situation where "the exception swallows the rule."
ABA said that if billions get displaced from community lending, it will cause harm to students, small businesses, homebuyers and others who are seeking loans.
"Crypto exchanges and the constellation of stablecoin-affiliated companies are not designed to fill the lending gap, nor will they be able to offer FDIC-insured products, a point they omit from their aggressive advertising," the letter states.
Crypto industry pushes back
Senate Banking Committee Chair Tim Scott released a bipartisan draft late Monday of the much-anticipated crypto market structure bill that, once passed, will establish broad cryptocurrency legislation in the US for the first time.
The bill includes updated language stating that digital asset service providers are barred from providing any interest or yield for users who are only holding their payment stablecoins. However, it does allow for "activity-based rewards" or other incentives that are linked to actions such as staking, posting collateral or making transactions.
As expected, the draft gives the US Commodity Futures Trading Commission (CFTC) regulatory authority over spot crypto markets, rather than the Securities and Exchange Commission (SEC).
The crypto industry has long preferred the CFTC to have that authority over the SEC.
The Senate Banking Committee is set to debate the draft on Thursday. The Senate Agriculture Committee, which oversees the CFTC, is expected to introduce its own version of the bill later this month.
Faryar Shirzad, chief policy officer at Coinbase, said in a post on X that the GENIUS Act had established the rules around stablecoin rewards and "reopening it now only creates uncertainty and risks the future of the US Dollar as commerce moves onchain."
He argues that the banks are really fighting over rewards because they collect more than $360 billion annually from payments and deposits through money "they park at the Fed," as well as credit card swipe fees.
"Stablecoin rewards threaten those margins—not because it reduces banks' ability to lend, but because they introduce real competition in payments," Shirzad said.
He added that consumers and businesses would realize billions in savings through lower payment costs.
"This is not a community bank issue, it's the big banks," Shirzad said. "That’s the real fight."