Identifying possible “loopholes” in legislation establishing legal standards around stablecoins, scores of banking advocacy groups presented a series of recommended actions to address industry concerns before its scheduled implementation in January 2027.
Following the GENIUS Act’s signing into law in July, Senate leaders received a pair of letters from industry stakeholders in the banking sector, as well as consumer advocates, detailing their concerns.
The trades described three key revisions they believe would help close loopholes that could be exploited. Specially, they recommended an expansion of the entities covered by its prohibition on interest payments for stablecoins, restoration of states’ authority over out-of-state-chartered financial institutions and a robust framework for approving nonfinancial entities to issue stablecoins.
Section 16(d) of the GENIUS Act was the sole focal point of one of the letters, endorsed by the American Bankers Association (ABA), Americans For Financial Reform, the Independent Community Bankers of America, the Conference of State Bank Supervisors, Money Transmitter Regulators Association, the National Consumer Law Center and the National Conference of State Legislatures.
The trades noted that Section 16(d) allows any state-chartered uninsured depository institution with a stablecoin subsidiary to perform traditional (i.e., not solely related to payment stablecoins) money transmission and custody activities nationwide through that subsidiary. By doing so, the trades argued it would allow these entities to bypass state licensing requirements and subject them to substantially less state oversight.
“There is no compelling federal interest to justify this potentially sweeping disregard for state oversight,” the trades wrote. “Neither Section 16(d) nor the uninsured bank provision contemplated in the Responsible Financial Innovation Act of 2025 RFI are necessary to effectuate a national stablecoin regulatory framework. In fact, these provisions would undermine that framework by giving payment stablecoin subsidiaries of uninsured banks broader powers than stablecoin subsidiaries of other entities. Removing this provision from the GENIUS Act and preventing its further expansion would better align federal law with the purpose and intent of national stablecoin regulation while preserving foundational safeguards embedded in our dual banking system.”
The second letter, endorsed by the ABA and 51 trade groups representing the 50 states and the District of Columbia, also called out concerns about Section 16(d), asserting it would weaken the states’ authority over uninsured, out-of-state-chartered institutions, such as special purpose depository institutions (SPDIs), operating across state lines without host state approval.
“States have both the constitutional authority and practical responsibility to license and supervise financial institutions that serve their residents,” the trades wrote. “Congress should repeal Section 16(d) to reaffirm states’ ability to protect consumers and ensure a level playing field for all institutions operating within their borders.”
The state-level trade groups also urged the lawmakers to recognize that some of the law’s provisions may not adequately safeguard against certain adverse actions related to stablecoins.
“The associations support the GENIUS Act’s prohibition against payment stablecoin issuers paying interest or yield on payment stablecoins, which appropriately reinforces stablecoins as a payment mechanism — not a store of value,” the trades wrote. “However, this restriction is easily bypassed when exchanges or other affiliates offer yield or rewards to stablecoin holders, undermining the law and distorting market incentives.”
The allure of incentives for consumers who elect to convert deposited funds into stablecoins may be detrimental to credit creation, because it would limit banks’ ability to “power the economy by turning deposits into loans.”
“To close this loophole and protect the financial system, we urge Congress to extend the stablecoin issuers interest prohibition to cover digital asset exchanges, brokers, dealers, and affiliated entities,” the trades wrote. “Doing so will preserve the role of banks in credit intermediation while allowing innovation in digital payments to flourish responsibly.”
The bill’s provisions allowing nonfinancial entities to become stablecoin issuers have raised concerns about potential conflicts of interest and a shift in economic power by effectively eliminating a legal barrier between banking and commerce, in the trades’ view.
“Allowing nonfinancial companies to issue payment stablecoins would dismantle this barrier, enabling these firms to drain deposits from community banks and reduce access to credit for households, small businesses, and farmers,” the trades wrote.
While banks support the GENIUS Act provision that would not allow public nonfinancial companies to become stablecoin issuers, it leaves room for permissible exceptions, which trade advocates believe should be eliminated.
“Any approval path poses serious risks and marks a major shift in federal policy that demands additional public scrutiny,” the trades wrote. “We urge Congress to strengthen this prohibition by eliminating all approval pathways and including nonfinancial private companies. Allowing such special treatment for certain companies risks regulatory arbitrage and undermines longstanding safeguards in financial regulation.”
Both letters were addressed to Senate Banking Committee Chair Sen. Tim Scott (R-S.C.) and Ranking Member Sen. Elizabeth Warren (D-Mass.), as well as Senate Digital Assets Subcommittee Chair Sen. Cynthia Lummis (R-Wyo.) and Ranking Member Sen. Ruben Gallego (D-Ariz.).
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