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America’s largest banking groups are lobbying Congress to amend new stablecoin legislation, warning that the rules as written could drain trillions of dollars in deposits from the financial system.
The dispute highlights intensifying competition between Wall Street and the digital asset sector for customer funds.
The contested “loophole”
US banks push back on stablecoins
At the centre of the row is the Genius Act, passed in July to regulate the $288bn stablecoin market.
The law prohibits issuers from paying yield or interest directly to customers, in part to prevent stablecoins from becoming substitutes for bank deposits.
US banks are permitted to issue their own tokens under the new framework, but they cannot reward holders with interest.
However, crypto exchanges would still be able to provide rewards indirectly on stablecoins issued by third parties such as Circle’s USDC or Tether.
Industry groups including the American Bankers Association, the Bank Policy Institute and the Consumer Bankers Association have described this as a “loophole” that could hand crypto firms a decisive competitive advantage.
Fears of a $6.6tn outflow
Banks argue that the ability to earn yield on stablecoins would tempt customers to withdraw money from traditional accounts in search of higher returns.
A US Treasury report earlier this year suggested that, depending on how stablecoins evolve, deposit outflows could reach $6.6 trillion.
In a letter to lawmakers, the groups warned that such an outcome would increase funding costs for banks, reduce their lending capacity, and ultimately push up borrowing costs for households and businesses.
Citi’s Ronit Ghose compared the potential disruption to the rise of money market funds in the 1980s, which siphoned deposits away from low-interest current accounts.
Crypto industry hits back
Crypto firms, meanwhile, have accused banks of seeking protectionist measures.
The Crypto Council for Innovation and the Blockchain Association wrote to senators arguing that banning exchanges from rewarding stablecoin holders would entrench the position of large banks and restrict consumer choice.
Coinbase’s chief legal officer Paul Grewal dismissed the “loophole” claim outright, calling it an attempt to avoid competition.
Policy at a crossroads
The White House has backed closer integration of crypto with mainstream finance, and Treasury secretary Scott Bessent has said stablecoins could bolster demand for US government bonds.
But as banks and crypto firms clash over the future of customer deposits, lawmakers face a delicate balancing act: how to encourage innovation without destabilising credit creation.
The outcome of this lobbying battle may determine whether stablecoins become a complement to banking — or a disruptive rival.
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