US Banking Associations Urge Congress To Eliminate Stablecoin Yield Alternative

A number of prominent banking institutions in the US have actively engaged with Congress over language in the GENIUS Act that has resulted in a yield loophole for stablecoins.

The Bank Policy Institute (BPI) noted in a letter delivered to Congress on 12 August 2025 that the current wording of the legislation permits stablecoin issuers to channel yield via third-party exchanges or intermediaries.

The GENIUS Act, passed on 18 July 2025 during President Trump’s administration, forbids stablecoin issuers from directly providing interest or yield to coin holders.

The conflict between banks and stablecoin issuers is becoming increasingly intriguing.

US banking groups anticipate that yield-bearing stablecoins will incite $6.6 trillion outflows from the traditional banking system.

Consequently, this may “undermine credit creation,” leading to “higher interest rates and fewer… https://t.co/3LsuhDE91x

— Sayan (@Sayan_Web3) August 13, 2025

Nonetheless, the legislation does not explicitly prohibit affiliated entities from acting on behalf of the issuers in this regard. This has prompted anxieties among leading US banking associations, which argue that this loophole might be taken advantage of to bypass the intent of the law.

Additionally, the group has cautioned that permitting affiliated entities to provide yield on stablecoins could threaten the stability of the US financial system, referencing a US Treasury projection that indicates such practices may lead to $6.6 trillion in deposit outflows from conventional banks.

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Massive Transition to Stablecoins May Elevate Borrowing Costs

Banks have historically depended on deposits to fuel their lending. However, they now face the potential of users diverting their funds into yield-generating stablecoins, which could drain those deposits and possibly raise borrowing costs for both households and businesses.

In their correspondence to Congress, the banking groups have firmly insisted that payment stablecoins should not provide interest in a way that is indistinguishable from banks or money crypto market funds that operate under stringent regulatory frameworks.

Unlike traditional financial (TradFi) institutions, stablecoin issuers do not provide loans or invest in securities to create returns, which fundamentally separates them from TradFi entities in their yield generation.

Still, this topic persists. Yield remains a significant factor influencing stablecoin adoption. Historically, stablecoin issuers have shunned offering interest directly. However, users can still accumulate returns through affiliated platforms.

For instance, holding USDC on exchanges like Coinbase or Kraken can produce yield, making stablecoins an appealing alternative to standard savings accounts.

Banking groups contend that this situation introduces the peril of deposit migration, especially in times of economic strain. As funds drift away from TradFi entities, the ensuing reduction in credit circulating supply could lead to escalated interest rates, diminished loan availability, and a rise in borrowing costs for everyday consumers.

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Coinbase and PayPal Continue to Provide Stablecoin Yield

Although the stablecoin crypto market remains relatively small compared to the $22 trillion US money supply, the US Treasury anticipates it could swell to $2 trillion by 2028.

Currently, the global stablecoin sector, worth $280.2 billion, is primarily dominated by Tether’s USDT and Circle’s USDC, which together represent over 80% of the total market value, with Tether having $165 billion and USDC $66.4 billion in circulation.

Meanwhile, amid the banking groups’ lobbying of Congress, Coinbase and PayPal, two prominent US-based crypto companies, continue to forge ahead with their respective stablecoin reward initiatives.

Coinbase & PayPal discovered the GENIUS Act loophole! Both provide stablecoin “rewards” despite the yield prohibition – Coinbase 4.1% on USDC, PayPal 3.7% on PYUSD.

Their argument: “We’re not issuers, we provide rewards, not interest.” Detractors contend it undermines the law’s purpose to delineate…

— Dr Efi Pylarinou (@efipm) August 10, 2025

Executives from both firms have indicated during their earnings calls that they intend to keep rewarding users holding stablecoins on their platforms, with Coinbase CEO Brian Armstrong asserting, “We are not the issuer. We don’t pay interest or yield—we provide rewards.”

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The post US Banking Groups Petition Congress To Shut Down Stablecoin Yield Workaround appeared first on 99Bitcoins.