The banking lobby in the United States holds a negative stance on interest-bearing stablecoins and the potential challenges they pose to the financial system—however, it may be too late to patch these "loopholes" in the GENIUS Act.
Led by JPMorgan CEO Jamie Dimon, the Bank Policy Institute (BPI), as a banking advocacy organization, sent a letter to Congress last week stating that stablecoins pose risks to the existing credit system.
BPI urged regulators to close the so-called loopholes in the GENIUS Act. This new legislation sets regulatory standards for the U.S. stablecoin industry. BPI believes that if funds shift from bank deposits to stablecoins, it will drive up loan costs and reduce the availability of credit to businesses.
The banking lobby has considerable influence in Washington. While this may complicate the legislative process, some argue that this approach merely delays an inevitable future—a financial landscape dominated by stablecoins.
Key figures in the crypto industry have long argued that stablecoin issuers should be allowed to pay interest to users. In March of this year, Coinbase CEO Brian Armstrong stated that interest-bearing stablecoins would give users more autonomy over financial products.
However, policy and public affairs attorney Andrew Rossow pointed out that the innovation of on-chain interest brings complex issues such as solvency, liquidity, and investor protection.
"The notion of 'easy compliance' overlooks the real complexities of ensuring appropriate reserve support, anti-money laundering/know your customer, and prudent regulation," he stated.
BPI directly addressed these concerns, specifically questioning the so-called "loophole" in Section 4(a)(11) of the GENIUS Act. This provision states that no interest or yield (whether in cash, tokens, or other forms) may be paid solely for holding, using, or retaining the payment stablecoin.
This provision seems to prohibit interest-bearing stablecoins, but Aaron Brogan, founder of the crypto law firm Brogan Law, stated, "Many believe that this provision does not prohibit cooperation between exchanges and issuers."
If other entities like exchanges allow stablecoins to earn interest, it would be based on factors other than "holding, using, or retaining" as defined in the GENIUS Act. The term "solely" in the GENIUS Act is a "strong legal limitation, meaning that as long as the cooperation has other bases, these actions are likely not restricted," he stated.
Therefore, while the GENIUS Act appears comprehensive on the surface, the prohibition on interest is actually quite lenient.
BPI claims that stablecoins typically offer rates higher than traditional bank products, "cannot replace bank deposits, money market funds, or investment products, and the issuers of payment stablecoins are not subject to the same regulation, oversight, or scrutiny as traditional financial institutions."
BPI believes this poses a threat to the existing credit model. Current customer deposits enable banks to create a large money supply through loans and credit lines.
"Encouraging funds to flow from bank deposits and money market funds to stablecoins will lead to higher loan costs and reduced loans for businesses and households," BPI stated.
Rossow noted that the banking industry's concerns are somewhat justified. "The strongest argument from the banking lobby is that allowing stablecoin issuers to pay interest would give rise to unregulated 'shadow banking,' threatening financial stability and consumer safety. Without strong capital, reserve requirements, and regulation, stablecoin issuers could trigger liquidity crises, increasing risks for users."
However, Rossow pointed out that the banking industry's argument that allowing issuers to pay interest on stablecoins is "inherently dangerous" is less convincing. Given that some proposals in the crypto industry suggest that allowing issuers to pay interest under proper regulation is feasible, "a blanket ban seems more about protecting traditional banking interests than achieving balanced progress."
In Washington, prioritizing self-interest has become the norm. In this regard, the powerful and conflicting interests in policymaking may dilute legislation and regulation, leading to policy gridlock and compromise, ultimately leaving neither side fully satisfied and exacerbating market uncertainty, Rossow stated.
He mentioned that before the 2008 financial crisis, mortgage institutions obstructed strict regulation of high-risk loans, directly leading to the collapse of the financial system.
"These lobbying battles will only deepen regulatory gaps and weaknesses, undermine financial stability and consumer protection, and further erode public confidence, especially when lobbying seems to favor vested interests—whether openly or not—will also shake the government's ability to regulate fairly," Rossow stated.
However, Brogan believes that the banking industry's actual ability to challenge stablecoins is limited, and the current approach is merely a fight against an irreversible trend. The crypto industry has made concessions regarding the GENIUS Act and is unlikely to accept further modifications.
The actions of the banking lobby are essentially "swinging swords at windmills." Sometimes new provisions are quietly inserted into other bills, but I doubt such significant content could pass unnoticed. I expect no further stablecoin legislation from this Congress, he stated.
Brogan also pointed out that the banking industry is merely resisting an inevitable trend. He cited the example of music industry executives opposing digital music and file sharing.
"People didn't want to pay with banks; they just had no choice in the past. Now, they have new options. Just as digital music files are superior to CDs, decentralized finance is better and more convenient than traditional banking," he noted in a recent blog.
While the banking industry wields significant influence in Washington, concerns about stablecoins may already be too late. The crypto industry now has the capability to robustly defend its interests, and the GENIUS Act is a testament to that.
What remains to be seen is how this new financial order will affect ordinary investors. BPI believes that a shift to stablecoins means "higher interest rates, fewer loans, and increased costs for ordinary businesses and households."
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Original article: “Banking Lobby Seeks to Amend GENIUS Act: Is It Too Late?”
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