Banking Groups Urge Regulators to Address Stablecoin Loophole
Several banking organizations, led by the Banking Policy Institute (BPI), are pushing for regulators to close a loophole they believe would allow stablecoin issuers and their affiliates to offer interest or yields on stablecoins, which they refer to as stubcoins.
In a letter addressed to Congress, BPI cautioned that not closing this loophole in the recently enacted Genius Act could disrupt the flow of credit for American individuals and businesses, potentially affecting $6.6 trillion in deposits that belong to the traditional banking system.
The Genius Act prohibits stablecoin issuers from providing profits or yields to token holders. However, according to BPI, the law does not clearly extend this prohibition to cryptocurrency exchanges or related entities. This could pave the way for issuers to circumvent the law by offering yields through these partners.
Offering yield is a significant strategy for stablecoin publishers to attract users. While some issuers provide native yields, others, like Circle’s USDC, allow users to earn rewards by holding stablecoin on exchanges such as Coinbase and Kraken.
There seems to be a genuine concern among banking groups that the proliferation of yield-bearing stubcoins could jeopardize the stability of the banking system. After all, banks rely on attracting deposits through high-yield savings products to support the loans they provide.
Concerns Over Stablecoins’ Impact on Credit Systems
A letter signed by various banking associations emphasized that stablecoins differ fundamentally from traditional bank deposits and money market funds. They argued:
“These distinctions are why payment stability should not be facilitated by highly regulated banks on deposits or allow yields like those offered by money market funds.”
BPI referenced a U.S. Treasury report from April, which indicated that permitting interest or yields on stablecoins could lead to deposit outflows of up to $6.6 trillion.
This kind of significant shift in the financial landscape could introduce serious risks to the American credit system. BPI warned:
“The result is an increased risk of deposit flight that could undermine credit creation throughout the economy, especially during challenging times. Corresponding reductions in credit supply could lead to higher interest rates, fewer loans, and increased costs for businesses and households.”
The Stablecoin Market: A Small Fragment of US Money Supply
The current market capitalization of stablecoins is approximately $280 billion—a small fraction compared to the U.S. dollar’s entirety, which the Federal Reserve reported at $22 trillion as of June.
The stablecoin market is largely controlled by Tether (USDT) and USDC, which collectively account for over 80% of the market. Tether’s valuation stands at $165 billion, while USDC is valued at $66.4 billion.
The Genius Act was signed into law by U.S. President Donald Trump on July 18. Some crypto analysts believe it may strengthen the dollar’s position, enhancing its role as the world’s leading reserve currency. The Treasury anticipates that the stablecoin market could expand to $2 trillion by 2028.
