The American Bankers Association today joined 52 state bankers associations in sending a joint letter to Congress urging lawmakers to clarify and enforce the statutory prohibition on payment stablecoin issuers and affiliated platforms offering yield, rewards or interest to stablecoin holders — a core provision of the GENIUS Act — because of the potential harm to economic activity.
Certain exchanges and other digital platforms are exploiting a loophole to offer yield-like incentives on stablecoins, a practice that “risks disintermediating core banking activity, including deposit taking and lending, which harms local communities,” the associations warned.
“The GENIUS Act envisioned payment stablecoins as a payments instrument, not an investment product. Congress barred issuers from paying interest for precisely that reason,” they said. “Closing the current loophole by clarifying that the prohibition extends to partners and affiliates would restore parity, protect consumers, and align practice with legislative intent.”
High-risk rewards
The associations emphasized that banks operate under strict regulatory frameworks, using deposits to fund lending that supports economic growth. Exchanges, by contrast, “do not perform similar regulated lending activity” and often fund rewards through marketing arrangements or high-risk strategies such as rehypothecation and speculative investments.
“Reducing deposits at banks will impair banks’ ability to make loans,” they said. “Requiring banks to increase deposit rates to compete with those offered by exchanges will make credit more expensive, directly affecting the economy — including for small businesses, farmers, homebuyers, students, and local governments.”
Regulatory mismatch
In the letter, the groups explained the significant consequences of exchanges taking advantage of the interest loophole and the overall mismatch in regulation:
- Regulatory imbalance. Banks must compete with unregulated platforms offering higher returns resulting from far riskier activities.
- Disintermediation of insured deposits. Consumers may move funds from FDIC-insured deposit accounts into payment stablecoins via exchange-offered products that only sound like interest-bearing accounts but lack equivalent protections. Banks, especially community banks, depend on stable deposits to maintain safety and soundness. When deposits leave the banking system, banks have fewer resources available to lend to small businesses, agriculture, homebuyers and families within their trade area. Exchanges do not recycle funds back into the local economy, banks do. In short, deposit flight into exchange-based products threatens the availability of credit in rural communities and undermines the core economic role banks play across the country.
- Consumer risk and potential loss. When an exchange fails, customers are unsecured creditors with no federal safety net – a reality seen in multiple recent collapses.
The letter also includes the following graphic that provides a snapshot of key similarities and differences between banks, issuers and exchanges:
