What the GENIUS Act was supposed to stop – and banks see the Stablecoin loophole

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 say there is a loophole in that exchanges and affiliate partners can still offer rewards on stablecoin balances, even if the issuer itself does not pay a yield.

• Smaller banks are more concerned 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 reward programs can be funded by platform revenue or affiliate structures, making the ban ineffective in practice if partner incentives continue.

In the United States, the GENIUS Act of 2025 aimed to provide a federal framework for payment stablecoins. The law established strict standards for reservations and consumer protection. However, the banking industry quickly warned Congress of a potential loophole in the stablecoin rules.

This article examines the goals of the GENIUS Act and the regulatory gaps that are of concern to bankers. He explains why community banks are impacted more than larger institutions, presents the crypto industry’s counterarguments, and explores the options available to Congress.

What the GENIUS Act tried to prevent

The GENIUS Act aimed 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 yields to holders solely for holding the token.

Banks have supported restrictions on yielding stablecoins. They argued that if stablecoins could directly earn a return, they could become an alternative to insured savings accounts. This could encourage some depositors to withdraw their funds from traditional bank accounts. Banks also warned that the impact would be heavier on smaller community banks, which rely on local deposits to fund their loans.

Did you know? Some US states already regulate money issuers that manage stablecoins. As a result, a single stablecoin platform can meet both the federal GENIUS Act requirements and dozens of separate state-level licensing and reporting requirements.

The “loopholes” that banks talk about

Community banks say the problem isn’t with what stablecoin issuers do directly. Instead, they argue that the flaw comes from the 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 “gap.” According to the group, exchanges and other partners can offer rewards to stablecoin holders even when the issuer itself does not pay interest.

This structural feature of the operation of stablecoins has highlighted the regulatory void. The GENIUS Act restricts the return paid by the issuer but does not necessarily prevent third-party platforms from incentivizing customers to use deposited stablecoins.

Banks argue that because channel partners can effectively circumvent the restriction, the law becomes less effective in practice.

• The issuer does not pay a return.

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

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

Did you know? Several U.S. stablecoin issuers hold reserves primarily in short-term U.S. Treasury bonds. This makes them indirect participants in public debt markets rather than 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, generally rely more on stable retail deposits.

That’s why community bankers view the gap debate as a local credit issue. If deposits are shifted from community institutions to stable balances, banks may have less ability 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 encouraging a shift from deposits and money market funds to stablecoins could increase lending costs and reduce the availability of credit. The BPI 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 say these programs may be funded through a combination of platform revenue, marketing grants, revenue sharing agreements, or affiliate structures tied to the issuance and distribution of stablecoins.

Although funding mechanisms vary by platform and token, the controversy is less about any particular program and more about the outcome of the incentives. Banks are concerned that stablecoins could offer their customers an alternative place to hold liquid funds.

Community banks are calling on Congress to close this gap not only for issuers but also for the affiliates, partners and intermediaries that generate returns in practice.

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

The Crypto Industry Counterargument

Crypto advocacy groups and industry associations reacted strongly. The Blockchain Association and Crypto Council for Innovation argue that Congress intentionally drew a bright line in prohibiting issuer-paid interest while preserving the ability for platforms to offer legal 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 a substitute for deposits.

• Stablecoins do not finance loans like banks: Comparing stablecoins to deposit-funded loans is a category error. 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 any incentive program as a prohibited activity could reduce consumer choice and limit payment experimentation.

What might be the likely policy options?

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

• Ban on affiliates and partners: Expand the GENIUS Act performance ban to affiliated issuers and distribution partners.

• Disclosure and consumer protection approach: Allow rewards but require clear disclosures. Crypto 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 safety port: Allow certain activity-based incentives. For example, the law could allow usage-based rewards while limiting balance-based incentives that resemble interest.

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