A coalition of U.S. community bankers is sounding the alarm that a loophole in last year’s GENIUS Act could let crypto platforms pay “backdoor” yields on stablecoins — potentially siphoning deposits away from Main Street banks and undermining local lending. What the banks say is happening The Community Bankers Council of the American Bankers Association told the Senate in a Monday letter that, while the GENIUS Act bars stablecoin issuers from directly paying interest to tokenholders, it does not stop issuers’ affiliates, exchanges or third‑party partners from delivering economically equivalent returns. In the council’s words, “With this activity, the exception swallows the rule.” How the loophole works in practice Major exchanges such as Coinbase and Kraken already offer rewards or incentives to users who hold certain stablecoins on their platforms. Those payouts are typically structured and paid by the exchanges or related partners rather than by the stablecoin issuers themselves — a technical distinction the council argues nonetheless reproduces the banned interest-bearing product the GENIUS Act sought to prevent. Why community banks are worried Banking groups contend that yield-adjacent stablecoin products could compete directly with insured savings accounts and draw deposits out of community banks. The council warned that if “billions are displaced from community bank lending,” local borrowers — small businesses, farmers, students and home buyers — could face reduced access to credit. They also stressed that crypto platforms do not offer federally insured products, lack relationship-based lending, and aren’t subject to the same prudential oversight as banks, raising consumer protection and financial stability concerns. What the bankers want The council urged Congress to amend federal stablecoin legislation to close the gap, explicitly prohibiting affiliates and partners of stablecoin issuers from offering interest or yield. That request is part of broader crypto market structure legislation currently under consideration on Capitol Hill. Broader industry reaction and stakes The Banking Policy Institute has similarly warned lawmakers that widespread adoption of yield-adjacent stablecoins could trigger massive deposit outflows — the group estimated as much as $6.6 trillion — a campaign backed by its chair, Jamie Dimon. Crypto advocacy organizations have pushed back. In a joint letter to the Senate Banking Committee, the Crypto Council for Innovation and the Blockchain Association argued payment stablecoins aren’t used to fund loans in the way bank deposits are, and that further tightening the GENIUS Act would hamper innovation, restrict consumer choice and slow development of digital payments. Where this leaves policy The exchange between community banks and crypto advocates frames a key regulatory choice for Congress: preserve a hard line separating payment stablecoins from bank-like, interest-bearing products — or allow market structures that some say recreate deposit-like yields outside the banking system. Lawmakers now face pressure to decide whether to explicitly close the “backdoor” channel the bankers warn could reshape deposit flows and local lending. Read more AI-generated news on: undefined/news