While Congress believed it had crafted airtight legislation with the GENIUS Act‘s prohibition on stablecoin yields, major banking institutions are discovering that financial innovation—much like water—has an uncanny ability to find the smallest regulatory cracks.
The legislation explicitly bars stablecoin issuers from directly offering interest or yield to token holders, yet it conspicuously omits any prohibition on affiliated entities or crypto exchanges providing such yields. This oversight has created what banking coalitions describe as a regulatory chasm wide enough to drive $6.6 trillion worth of deposits through.
Financial innovation finds the smallest regulatory cracks, creating a chasm wide enough for trillions in deposits to escape through.
Stablecoin issuers like Circle have embraced this creative interpretation with entrepreneurial enthusiasm, routing yields through platforms such as Coinbase and Kraken. The arrangement maintains technical compliance while delivering precisely what the Act presumably sought to prevent—competitive returns that make traditional bank deposits look about as attractive as rotary phones in a smartphone world.
Major banking groups, including the Bank Policy Institute, American Bankers Association, and Independent Community Bankers Association, have expressed alarm that borders on existential dread. Their concern transcends typical competitive anxiety; they’re warning of systemic disruption to the traditional banking model itself. Some large institutions surprisingly view stablecoins positively despite the broader industry concerns.
The mathematics are sobering. With the current stablecoin market valued at approximately $280 billion and projections suggesting expansion to $2 trillion by 2028, the deposit flight risk compounds exponentially. USDT and USDC, commanding roughly 80% market share, represent the vanguard of this potential disruption.
Banking coalitions argue that massive deposit outflows would severely impair lending capacity, potentially triggering higher interest rates and restricted credit availability for consumers and businesses. The irony is palpable: legislation intended to protect financial stability may have inadvertently created conditions for its destabilization.
The yield component remains central to stablecoins’ value proposition, creating competitive pressure that traditional banks struggle to match given their regulatory constraints and operational overhead. As stablecoin holders enjoy returns that meet or exceed typical bank rates, the deposit migration intensifies.
The 2025 U.S. Treasury report’s warnings about similar risks underscore the urgency. Banks now find themselves advocating for legislative clarity—not to stifle innovation, but to prevent what they characterize as an unintended regulatory arbitrage that could fundamentally reshape American finance. State bankers associations are joining forces with national banking groups to push for comprehensive legislative action that would close these regulatory gaps. The concern is heightened by stablecoins’ growing role as trading pairs on exchanges, which reduces exposure to cryptocurrency volatility while maintaining competitive yields.
