Key Takeaways
- The GENIUS Act prohibits stablecoin issuers from paying interest.
- However, revenue-sharing models manage to bypass this limitation.
- Banking industry groups are lobbying Congress to close the loophole.
While the GENIUS Act nominally prohibits interest-bearing stablecoins, providers like Coinbase and PayPal have exploited a loophole in the legislation to reward users.
This has prompted alarm among Wall Street banks, which increasingly view stablecoins as a threat to their deposit balances.
Yield-Bearing Stablecoins
On the surface, the GENIUS Act prevents stablecoin issuers from paying interest. However, it doesn’t impose restrictions on revenue-sharing models between issuers and distribution platforms.
In turn, platforms have started to pass those revenues on to end-users, letting them generate a yield from their stablecoin balances.
For example, Coinbase pays around 4% APY on USDC balances, funded from revenues it receives from Circle.
PayPal’s PYUSD yield works in a similar way, with customers receiving a cut of the profit from stablecoin reserves generated by issuer Paxos.
A Threat to Bank Deposits
With stablecoin yields offering interest rates that compete with, and often outperform bank deposit accounts, Wall Street is spooked.
Industry associations have moved to block banking license applications by stablecoin issuers, arguing that they shouldn’t be allowed to offer products that compete with bank deposits without being subject to the same prudential rules.
In a recent blog post, the Bank Policy Institute, which counts Bank of America, HSBC and Morgan Stanley as members, voiced the industry’s concerns.
Left as it stands, the stablecoin loophole will create “greater deposit flight risk, especially in times of stress, that will undermine credit creation throughout the economy,” the BPI concluded.
Other groups that have lobbied for changes to the GENIUS Act include the Consumer Bankers Association and the American Bankers Association, which have asked Congress to extend the prohibition of stablecoin yields to cover brokers, dealers, and exchanges.
Crypto Industry Pushes Back
Responding to the banking industry’s lobbying efforts, crypto groups have initiated their own campaign to influence lawmakers.
In letters to the Senate Banking Committee, the Crypto Council for Innovation and the Blockchain Association argued that restricting stablecoin yields would stifle competition, “protecting banks at the expense of broader industry growth, competition, and consumer choice.”
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James Morales is CCN’s blockchain and crypto policy reporter. He has been working in the news media since 2020, writing about topics such as payments, banking and financial technology. These days, he likes to explore the latest blockchain innovations and the evolving landscape of global crypto regulation.
With an educational background in social anthropology and media studies, James uses his platform as a journalist to explore how new technologies work, why they matter and how they might shape our future.
