Community banks sound alarm on yield-bearing stablecoin loophole in GENIUS

A group of community bankers is pressing lawmakers to draw clear boundaries for yield-generating stablecoins, arguing that a lack of clear limits could draw deposits away from local banks and disadvantage small businesses and households.

In a letter sent this week to the U.S. Senate, the American Bankers Association’s Community Bankers Council revived an ongoing argument over the treatment of yield-generating stablecoins. They say that gaps need to be closed in a stablecoin bill passed over the summer, nicknamed GENIUS, that could allow crypto firms to offer rewards from yield-bearing programs to stablecoin holders. 

Bankers say closing those gaps is critical because it could impact local banks’ ability to lend money, as banks use deposits to provide loans to their communities. 

“If billions are displaced from community bank lending, small businesses, farmers, students, and home buyers in towns like ours will suffer,” the council said in the letter.

Deposit drain?

Banks and the crypto industry have been at odds this past year on stablecoin yield treatment. Banking associations have said that the stablecoin law passed over the summer has weak prohibitions against stablecoin issuers paying interest to holders, which could make those assets more attractive as stores of value. In an email addressed “to bank CEOs,” ABA President Rob Nichols said the “loophole” could mean that trillions of dollars are diverted away from banks. 

“Lawmakers need to understand the very real risks to local communities in their state if they allow this loophole to be exploited,” Nichols said. 

Meanwhile, in a letter sent to lawmakers last month, the Blockchain Association argued that not allowing platforms to offer rewards could “weaken competition across payments and financial services, undermine regulatory clarity, and reopen a settled law.” The group also said that the argument that stablecoin rewards could threaten community banks is not accurate. 

“Independent analysis shows no disproportionate deposit outflows tied to stablecoin adoption, and banks currently hold trillions of dollars in reserves earning interest at the Federal Reserve rather than being deployed into loans,” the Blockchain Association said. 

Treatment of yield-bearing stablecoins could be addressed in senators’ work on a sweeping bill to regulate the crypto industry at large. A group of senators is meeting on Tuesday to discuss that bill, according to PunchBowl News. 

© 2026 The Block. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.