Reiterating long-held concerns about a potential “loophole” in the Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act), the American Bankers Association and 52 state-level bankers associations urged Congress to take action.
The trade groups have previously expressed concerns that the absence of an explicit prohibition against payment stablecoin issuers and affiliated platforms offering yield, rewards or interest to stablecoin holders could lead to potential harm to economic activity.
“The GENIUS Act envisioned payment stablecoins as a payments instrument, not an investment product,” the trades wrote. “Congress barred issuers from paying interest for precisely that reason. Closing the current loophole by clarifying that the prohibition extends to partners and affiliates would restore parity, protect consumers, and align practice with legislative intent.”
The bankers asserted that certain exchanges and other digital platforms are exploiting a loophole to offer yield-like incentives on stablecoins, a practice that “risks disintermediating core banking activity, including deposit taking and lending, which harms local communities.”
Furthermore, they emphasized the discrepancy in regulatory oversight between banks and exchanges, noting that they “do not perform similar regulated lending activity.”
The trades addressed an important question they often are asked with respect to how the different entities treat “interest” and “rewards” and the implications to consumers and the economy:
“Building on our previous correspondence with Congress on this issue, this letter addresses a question we consistently receive: ‘What is the difference between the ‘interest’ a bank pays on a deposit account and the ‘interest’ or ‘rewards’ that issuer partners and affiliates pay on stablecoins, and why are banks unable to pay depositors a rate of interest similar to what exchanges are offering?’ The answer to this question lies at the heart of how banks support the economy. When a customer deposits money in a bank, that deposit becomes a regulated liability of the bank. The bank may pay the depositor interest on his or her balance. The bank uses deposits as a source of funding for regulated lending activities under strict supervision, capital rules, liquidity standards, and ongoing examination. The bank earns interest on those loans, and the difference between the interest rate the bank earns from lending and the interest rate the bank pays on deposits is the bank’s net interest spread or net interest margin. Managing this spread is critical to the bank’s economic viability, and thus the bank’s ability to offer a higher deposit interest rate is limited by the rates it charges for loans.”
Without congressional intervention, the trades suggested that banks will need to increase deposit rates to compete with those offered by exchanges, which will make credit more expensive. This increase in the cost of credit would in turn directly affect the economy, including small businesses, farmers, homebuyers, students and local governments.