TL;DR
- US community banks warn of a loophole in the GENIUS Act.
- Exchanges can offer rewards on stablecoins, circumventing the interest ban.
- Banks fear this could pull deposits away from local lending.
Small and mid-sized banks in the United States are raising concerns about a specific part of the GENIUS Act of 2025. The federal law provides a framework for payment stablecoins. It sets rules for reserves and consumer protections. A core goal of the legislation was to keep stablecoins functioning as payment tools. The law explicitly bans stablecoin issuers from paying interest or yield directly to holders.
Bankers now argue that a regulatory gap exists. They say crypto exchanges and other distribution partners can offer rewards on stablecoin balances. This practice effectively provides yield to customers even though the issuer does not pay it. Community banking groups claim this exploits a loophole in the current rules.
The concern centers on the structure of stablecoin distribution
A stablecoin issuer complies with the GENIUS Act by not paying interest. However, a partnering exchange or platform can still create a reward program for users who hold that stablecoin on its system. These rewards can come from platform revenues or marketing budgets.
From a customer’s perspective, the outcome is similar to earning interest. They receive a return for holding the stablecoin balance. Bankers argue this circumvents the intent of the law. The American Bankers Association’s Community Bankers Council voiced this concern to the Senate in early January 2026. The group urged lawmakers to tighten the GENIUS Act framework to address the issue.
Community banks express more alarm than large national banks. Their business model relies more heavily on local retail deposits. These deposits fund loans for small businesses, mortgages, and agricultural operations in their communities. Banks warn that if deposit accounts move to stablecoins for rewards, it could reduce available credit locally. The Banking Policy Institute supports this view, stating such a shift could raise lending costs.
Crypto industry groups present a counterargument
Organizations like the Blockchain Association state Congress intentionally drew a clear line. The law bans issuer-paid yield but allows platforms to offer incentives. They assert that payment stablecoins are not bank deposits and should not be regulated as such. Treating all rewards as prohibited could limit innovation in payments, according to these groups.
Policymakers now consider several options to address the debate. One path is to extend the GENIUS Act’s yield ban to include affiliates and distribution partners of issuers. Another approach focuses on consumer disclosure. This would allow rewards but require platforms to explain clearly who funds them and the associated risks. A third option could create a narrow safe harbor, permitting rewards tied to specific usage rather than passive balance holding.
