Banks vs. Crypto: The GENIUS Act Sparks a New Battle Over Stablecoin Yields

A new regulatory clash is unfolding in Washington as banks and crypto firms fight over who should be allowed to pay interest on stablecoin deposits. At the center of the dispute is the recently enacted GENIUS Act, a stablecoin regulation framework that explicitly prohibits issuers such as Tether from paying dividends or interest directly to holders. However, a key loophole has allowed third-party platforms, including crypto exchanges and fintech apps, to distribute yield generated from stablecoin-related activities to users.

Traditional banking groups are now aggressively lobbying lawmakers to close that loophole. They argue that allowing crypto platforms to offer yield on cash-equivalent stablecoins amounts to regulatory arbitrage and undermines the regulated banking system. In briefings with Capitol Hill, banking lobbyists warned that if the current rules remain unchanged, depositors could move vast sums out of commercial banks and into digital asset platforms. Estimates cited by banking groups suggest potential deposit outflows could reach as high as $6.6 trillion, a shift they claim would weaken banks’ ability to fund mortgages, business loans, and consumer credit.

According to the banking industry, such a large-scale migration of deposits would erode banks’ capital base, forcing lenders to reduce lending capacity and raise borrowing costs for households and businesses. From their perspective, restricting stablecoin yield programs is necessary to protect financial stability and preserve the core functions of the traditional banking system.

Crypto firms strongly reject that argument. In a December 18 letter to the US Senate Committee on Banking, a crypto industry coalition urged lawmakers not to revisit or expand the scope of the GENIUS Act so soon after its passage. The group warned that reopening the issue would undermine regulatory certainty and signal that even recently enacted compromises are subject to rapid renegotiation.

The coalition framed banks’ concerns as protectionist, arguing that banks are trying to preserve access to low-interest deposits while consumers face inflation and higher interest rates elsewhere. They noted that Treasury markets are currently offering yields near 4% and argued that stablecoin rewards programs help households share in higher-rate environments. Gemini co-founder Tyler Winklevoss echoed that view, calling the banking lobby’s effort an attempt to relitigate a settled legislative issue.