Banking executives are discovering that legislative precision matters considerably more than they initially anticipated, as the GENIUS Act‘s carefully crafted prohibition on stablecoin yields has sprouted what industry critics are calling a regulatory loophole large enough to accommodate $6.6 trillion in potential deposit flight.
The July 2025 legislation, enacted under President Trump’s administration with considerable fanfare about protecting traditional banking systems, explicitly bars stablecoin issuers from directly offering interest to token holders. What it doesn’t prohibit—and here’s where legislative draftsmanship meets crypto ingenuity—is affiliated entities or third-party exchanges from providing those same yields through carefully structured arrangements.
Legislative draftsmanship meets crypto ingenuity as exchanges exploit carefully structured arrangements to circumvent stablecoin yield prohibitions.
Major exchanges like Coinbase and Kraken have enthusiastically embraced this distinction, rewarding USDC holders through mechanisms that technically comply with the Act’s letter while seemingly violating its spirit. The result is a masterclass in regulatory arbitrage that would make any derivatives lawyer proud, if slightly concerned about systemic implications.
The Bank Policy Institute, American Bankers Association, and Consumer Bankers Association have formally petitioned Congress, warning that yield-bearing stablecoins could trigger massive outflows from traditional deposits. Their concern isn’t merely competitive anxiety (though that’s certainly present)—they’re projecting genuine disruption to credit creation mechanisms that underpin business and household lending.
The economic mechanics are straightforward: deposit outflows reduce banks’ available capital for loans, potentially increasing borrowing costs and constraining credit availability. When multiplied across the financial system, such dynamics could materially impact lending capacity precisely when the economy requires stable credit flows.
Banking groups emphasize that this isn’t about stifling innovation but preserving financial stability through consistent regulatory application. They argue the loophole creates unfair competitive advantages while potentially destabilizing deposit bases that traditional institutions rely upon for lending operations. With stablecoins currently representing approximately $280 billion in market capitalization, the scale of potential disruption continues expanding rapidly. The GENIUS Act’s requirement for 1:1 reserve backing in high-quality liquid assets was intended to provide stability, yet the yield loophole may undermine traditional banking relationships.
Meanwhile, stablecoin advocates counter that their market remains relatively modest compared to overall money supply, and that dollar-denominated tokens actually strengthen global dollar usage. This perspective frames the debate as innovation versus incumbency rather than stability versus disruption.
Regulators now face pressure to issue clarifying guidance while Congress considers amendments to close what banking executives characterize as an unintended but dangerous oversight in otherwise well-intentioned legislation.
