Major banking groups have already reacted negatively to the GENIUS Act – the first stablecoin legislation in the United States – claiming that some of its provisions may destabilize the traditional financial system.
The legislation, which was passed in July 2024 to ensure the leadership of the nation in digital assets and bring transparency to the stablecoins industry worth billions of dollars, was designed to do both.
Banks warn, however, that restrictions on the payment of interest to holders of stablecoins could cause huge sums to be diverted from deposit accounts, which would threaten balance sheets.
The Financial Times reported on 25 August that banks have been lobbying legislators to change the rules now before they become significant.
The GENIUS Act prohibits banks from providing yield
The GENIUS Act established a framework to oversee and issue stablecoins. It also set clear limitations on the way in which they can be operated.
The banks that issue their own stablecoins are prohibited from offering any yield or interest to the holders.
This rule is designed to prevent speculation and maintain the stability of the system. Digital assets are supposed to mimic fiat currencies.
Although banks have been restricted from offering rewards, cryptocurrency exchanges are still able to offer them for customers who hold stablecoins such as Circle USD Coin or Tether USDT.
This loophole has been labelled by bank representatives as a “loophole”, arguing that it could give exchanges an advantage in the market and influence customers’ behaviour.
Banks alerted of $6.6 Trillion outflow
A report from the Treasury Department in April has been cited by banking groups to illustrate potential risks.
Report estimates that stablecoins with higher yields can divert as much as $6.6 trillion away from traditional banks if businesses and consumers move their deposits to exchanges offering better returns.
They argue that such outflows would not only undermine banks’ lending ability but also could create new vulnerabilities within the financial sector.
These groups urge lawmakers to revisit these provisions and warn that the industry could be unstable if the imbalance in the system is not addressed.
They are lobbying because of the growing fear within finance institutions that these rules may accelerate a move from traditional banks to digital platforms.
Crypto Industry rejects all concerns
The banks have been criticized by industry advocates who claim that the new rules are a deliberate balance of innovation and supervision.
Crypto Council for Innovation (CCI) and the Blockchain Association argue that the so called loophole does not represent a weakness but rather a means to promote competition.
They claim that restricting exchanges would tilt the market towards banks, while decreasing consumer choice.
Paul Grewal’s, the chief legal officer at Coinbase, has reacted to suggestions that the industry is destabilizing. He maintains that the exchanges must retain the right to reward their users who hold stablecoins.
The GENIUS Act, they say, is a landmark for regulatory clarity and provides a framework to a fast-growing asset class.
As new information becomes available, this post US banks lobby for GENIUS stablecoin act amendment. Citing $6.6 trillion in risk could be updated.
