Key conclusions

• The GENIUS Act was intended to maintain stablecoins as payment tools rather than savings products. As a result, it prohibits issuers from paying interest or profits to stablecoin holders.

• Local banks argue that there is a loophole because exchanges and affiliate partners can still offer rewards for stablecoin balances even if the issuer itself does not pay the profit.

• Smaller banks are more concerned than larger ones because they rely heavily on local deposits. Any outflow of deposits could directly reduce lending to compact businesses and households.

• Banks also note that rewards programs may be funded by platform revenues or affiliate structures, making the ban effectively ineffective if affiliate incentives continue.

In the US, the GENIUS Act of 2025 aimed to provide a federal framework for payment stablecoins. The Act established stringent standards for provisions and consumer protection. However, the banking industry soon warned Congress about a potential loophole in stablecoin regulations.

The article examines what the GENIUS Act was intended for and the regulatory gap that raises concerns among bankers. Explains why community banks are more affected than larger institutions, presents counter-arguments from the cryptocurrency industry, and explores the options available to Congress.

What was the GENIUS Act supposed to prevent?

The GENIUS Act was intended to prevent stablecoins from functioning as savings products. Lawmakers wanted stablecoins to continue operating as payment instruments. For this reason, the law prohibits stablecoin issuers from paying interest or profits to holders solely for holding the token.

Banks have supported restrictions on yielding stablecoins. They he argued that if stablecoins could directly pay out profits, they could become an alternative to insured savings accounts. This could encourage some depositors to transfer funds from conventional bank accounts. Banks also warned that smaller local banks that rely on local deposits to fund lending would be hardest hit.

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

The “gaps” that banks talk about

Local banks say the problem is not what the stablecoin issuers are doing directly. Instead, they argue that the vulnerability is created through issuers’ distribution partners, including exchanges and other crypto platforms.

In early January 2026, the American Bankers Association’s Council of Community Bankers urged the Senate to tighten the GENIUS framework, warning that some stablecoin ecosystems are exploring a perceived “gap.” According to the group, exchanges and other partners can provide rewards to stablecoin holders even if the issuer itself does not pay interest.

This structural feature of how stablecoins work has highlighted a regulatory gap. The GENIUS Act limits the income paid by the issuer, but does not necessarily prevent third-party platforms from encouraging customers to operate deposited stablecoins.

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

• The issuer does not pay profitability.

• The stablecoin balance storage platform pays out rewards to the depositor.

• From a customer’s perspective, they make money by simply holding stablecoins.

Did you know? Several U.S. stablecoin issuers hold reserves primarily in the form of short-term U.S. Treasury bills. This makes them indirect participants in public debt markets rather than conventional banking systems.

Why local banks care more than huge banks

Vast banks can more easily diversify their funding sources and access wholesale funding markets than smaller lenders. On the other hand, community banks tend to be more dependent on stable retail deposits.

That’s why local bankers see the loophole debate as a local credit issue. If deposits are moved from social institutions to stablecoin balances, banks will be less able to lend to compact businesses, farmers, students and homebuyers.

Banks have attempted to quantify this risk. The Banking Policy Institute (BPI) does he argued that encouraging a shift from deposits and money market funds to stablecoins could raise lending costs and reduce the availability of credit. BPI also warned that these incentives undermine the spirit of the ban on issuer-paid yield from stablecoins.

How rewards can be offered without the issuer paying interest

Banks argue that these programs can be funded through a combination of platform revenues, marketing subsidies, revenue-sharing arrangements or affiliate structures tied to the issuance and distribution of stablecoins.

While funding mechanisms vary by platform and token, the controversy is less about a single program and more about the outcome of the incentive. Banks are concerned that stablecoins could offer bank customers an alternative place to store liquid funds.

Community banks are calling on Congress to close the loophole not only for issuers, but also for the affiliates, partners and intermediaries who practically ensure profitability.

Did you know? Stablecoin transaction volumes often spike on weekends and holidays when banks are closed. This highlights that cryptocurrency payment rails operate continuously outside normal banking hours.

The crypto industry’s counterargument

Cryptocurrency advocacy groups and industry associations have strongly opposed it. Blockchain and Crypto Association Innovation Council to argue that Congress has deliberately set a clear line by prohibiting issuer-paid interest while leaving platforms free to offer lawful rewards and incentives.

Counter-arguments from the cryptocurrency industry include:

• Payment stablecoins are not bank deposits: Stablecoins are primarily payment and settlement tools and should not be regulated as deposit substitutes.

• Stablecoins do not finance loans like banks: Comparing stablecoins to deposit-funded loans is a category mistake. Industry groups argue that forcing stablecoins to mimic the economics of banks would stifle competition rather than protect consumers.

• Banning third-party rewards could stifle innovation: Treating any incentive program as a prohibited activity could limit consumer choice and limit payment experimentation.

What might be the likely strategic options?

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

• Prohibition for partners and partners: Extending the GENIUS Act’s profitability prohibition to affiliates of issuers and distribution partners.

• Approach to disclosure and consumer protection: Allow rewards but require clear disclosures. Cryptocurrency companies could be required to explain who pays prizes, what risks are involved, and what is uninsured. Regulators could also impose stricter marketing rules to prevent rewards from being presented as bank-like interest.

• Narrow Sheltered Haven: Allow specific activity-based incentives. For example, the law could allow usage-linked rewards while limiting balance-based incentives, which resemble interest.

How Congress resolves this issue will determine whether stablecoins remain primarily payments tools or potentially evolve into more banking-like stores of value.