Community banks across the U.S. are pressing the Senate to address what they describe as a GENIUS Act loophole before January 2026. They warn the bill could allow stablecoin issuers to introduce yield-bearing products without meeting bank-level requirements, even as industry groups continue to push lawmakers to preserve stablecoin rewards under the current framework, as outlined in this report on stablecoin rewards lobbying. The real problem? Some stablecoins might end up acting just like interest-bearing deposits, but with none of the usual banking oversight.
Lawmakers are about to move the GENIUS Act forward, and banks aren’t happy with how things stand. They’re saying, look, if you don’t tighten up the language, you’re setting up an unfair fight. Regulated banks have to play by the rules, but crypto firms offering dollar-backed tokens would get a free pass. That’s not a level playing field.
Why banks are raising concerns now
Community banks say the timing matters because stablecoin legislation is moving closer to becoming law. Once enacted, the GENIUS Act would establish a federal framework for issuing and overseeing stablecoins used for payments, setting long-term rules for how these products operate in the U.S. financial system.
Banks say their concern is not payment-focused stablecoins, but tokens that add yield or interest-like returns. Those designs could compete with checking and savings accounts without deposit insurance or bank-level oversight, and market analysts note this risk is already proven by how quickly yield-paying crypto products attract capital.
That concern ties directly to how the GENIUS Act defines allowed stablecoin activity. While the bill treats stablecoins mainly as payment tools backed by high-quality reserves, banks warn that exceptions in the language leave room for interpretation.
Community banks warn that without clearer guardrails, the GENIUS Act loophole could allow stablecoins to function like interest-bearing deposits without complying with bank-level rules, a concern that echoes broader debates around crypto regulatory oversight outlined in recent discussions on CFTC crypto regulations.
Not everyone agrees that tighter language would curb innovation. Some market participants say clearer stablecoin rules could strengthen the U.S. market by increasing trust.
Christopher Perkins, president of CoinFund, said regulated U.S. stablecoins give investors greater confidence by ensuring holdings are fully backed and properly supervised, which makes onshore issuance more attractive.
“I think many investors will choose the onshore regulated version of stablecoins because of the incremental confidence they deliver,” Perkins said.
Supporters argue the GENIUS Act debate is less about limiting stablecoins and more about defining which models can scale responsibly within the U.S. system.
How the GENIUS Act loophole could work
The debate centers on how the GENIUS Act defines permitted stablecoin activity. The bill primarily treats stablecoins as payment tools backed by high-quality reserves such as cash and short-term government bonds.
Banking groups say that the current wording doesn’t clearly say that issuers can’t share the yield from those reserves with token holders. That yield could look like interest if it were allowed, even if it were framed differently.
From the banks’ point of view, this is a way around the problem. A stablecoin issuer could get users by offering returns backed by reserve assets, and they wouldn’t have to deal with the same regulatory issues that banks do when they pay interest on deposits.
Deposit competition without deposit rules
Community banks stress that under the current system, they operate under strict safeguards to protect consumers and financial stability, including capital rules, liquidity standards, routine examinations, and federal deposit insurance. They argue the GENIUS Act loophole risks undermining that framework as global regulators move toward tighter standards, similar to approaches outlined in recent discussions on UK crypto regulation.
Banks argue that interest-paying stablecoins would compete for the same customer funds without offering the same protections, potentially pulling deposits away from local banks and limiting their ability to lend to small businesses and households.
Experts say that this argument makes a lot of sense for smaller banks, which depend on deposits as their main source of funding and don’t have as much room to move around as big national banks.
Lawmakers face a policy line-drawing exercise
The debate makes it hard for lawmakers to make decisions. There is a lot of bipartisan interest in making the rules for stablecoins clearer on the one hand. There is also worry about accidentally making a shadow banking system.
The debate asks whether stablecoins should serve only as payment tools or whether some designs effectively substitute for bank deposits. If this is the case, banks say they should have to follow the same rules.
Some policymakers are concerned that permitting yield-bearing stablecoins could compromise decades of banking regulation by transferring deposit-like activities to entities with diminished oversight.
What people who make stablecoins say
People who support stablecoins say that forcing every issuer to follow the rules of traditional banking will stifle innovation. They say reserve-backed stablecoins differ from bank deposits because their structure avoids lending and maturity transformation.
From this perspective, sharing reserve yield with users could be framed as a rebate or incentive rather than interest. Supporters argue that clear disclosure and strict reserve requirements provide sufficient user protection, a view that aligns with broader international debates reflected in cases such as Poland’s crypto bill veto.
Market analysts say that this tension is a sign of a bigger regulatory problem. Cryptocurrency products often do the same things as traditional finance but in a different way.
Wider effects on crypto markets
The argument over the GENIUS Act could change how money moves between banks and crypto platforms in 2026. If lawmakers close the loophole, stablecoins may only be able to be used for payments and settlements. This would make them less appealing as savings options.
If the loophole stays open, yield-bearing stablecoins could grow quickly, especially when people want to make money on cash they don’t need. In that case, banks and crypto issuers might have to fight for business more quickly.
The message is clear for both investors and builders. It’s important to know what regulatory definitions mean. Small changes in the language of the law can make a product work or not work.
Historical echoes from past financial debates
Banking groups compare this to past financial innovations that made it hard to tell where the rules ended and the rules began. For example, money market funds grew quickly because they offered features similar to bank deposits but followed different rules.
After times of stress, those products became a focus of regulatory reform. Banks say that lawmakers should learn from the past and deal with possible risks before they get worse.
What comes next
As talks continue, the Senate is likely to look at changes to the GENIUS Act. It is still unclear if lawmakers will explicitly ban stablecoins that earn interest or add more protections.
The debate for now shows that stablecoin regulation is moving into a more detailed stage. There was an easy agreement about tokens that focus on payments, but now there are harder questions about competition, risk, and financial structure.
The main point for readers is clear. Stablecoins are no longer just a small problem in the crypto world. They now sit at the center of a broader debate over the future of money, banking, and regulation in the United States.
