The GENIUS Act features a key rule that bars stablecoin issuers from paying curiosity on to holders. Whereas this provision was seemingly supposed to guard banks from dropping deposits, it has unintentionally created a extremely worthwhile regulatory loophole.
The rule carves out a enterprise alternative for crypto exchanges and fintech distributors. They’ll now seize this yield and switch it into a robust engine for innovation.
Bypassing the Stablecoin Yield Ban
A key function that has sparked vital debate in gentle of the GENIUS Act has been its ban on stablecoin issuers from paying any curiosity or yield on to the individual holding the stablecoin. By doing so, the Act reinforces stablecoins as a easy fee technique as a substitute of an funding or retailer of worth that competes with financial institution financial savings accounts.
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The availability was seen as a settlement function to maintain financial institution lobbyists content material and make sure the GENIUS Act’s passage. Nevertheless, stablecoin distributors have discovered a loophole within the laws’s tremendous print and are thriving off of it.
The legislation solely bans the issuer from paying yield however doesn’t prohibit a 3rd occasion, like a crypto trade, from doing so. This hole allows a worthwhile workaround.
The financial institution foyer is livid about stablecoin yield underneath the GENIUS Act. They’re calling it a “loophole” that wants closing.
However this is what they’re lacking: We have seen this film earlier than. And it constructed a whole era of fintech firms.
🧵
— Simon Taylor (@sytaylor) October 5, 2025
The issuer, which earns curiosity from the underlying reserve belongings like US Treasury Payments, passes that earnings to the distributor. The distributor then makes use of this yield as a direct funding supply to supply high-interest rewards to customers.
Coinbase is a key instance of this phenomenon. It receives a portion of the yields issuers like Circle and Tether make for providers and buyer acquisition. It then presents customers holding USDC or USDT on its platform a excessive annual proportion yield of 4.1%.
This strategy creates a aggressive benefit towards conventional banks by offering a extra enticing yield and consumer expertise. The banking sector has responded to this problem by voicing clear opposition.
Banks Warn of Large Deposit Outflows
In August, the Banking Coverage Institute urged Congress, which is presently debating a crypto market construction invoice, to tighten stablecoin rules.
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“Without an explicit prohibition applying to exchanges, which act as a distribution channel for stablecoin issuers or business affiliates, the requirements in the GENIUS Act can be easily evaded and undermined by allowing payment of interest indirectly to holders of stablecoins,” the letter learn.
Financial institution deposits can be hardest hit. In April, a Treasury Division report estimated that stablecoins may result in as a lot as $6.6 trillion in deposit outflows. With third-party distributors in a position to pay curiosity on stablecoins, the deposit flight is probably going larger.
The financial institution foyer already bought itself a ban on yield-bearing stablecoins to guard its regulatory moat for deposits.
Now the banks are shaking of their boots about reward applications. Apparently stablecoins are solely okay if holders get actually nothing.
You do not hate TradFi sufficient.
— Jake Chervinsky (@jchervinsky) September 11, 2025
As a result of banks depend on deposits as their major supply of funding for issuing loans, a decline in these deposits inevitably limits the banking sector’s capability to increase credit score.
Nevertheless, banks have confronted related existential threats up to now.
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Classes from the 2011 Durbin Modification
In keeping with a thread by FinTech professional Simon Taylor on X, the implications of the GENIUS Act loophole for banks mirror the consequences of the 2011 Durbin Modification.
Congress handed this laws to scale back the charges retailers needed to pay to banks when a buyer used a debit card. Earlier than the Modification’s passage, these charges have been unregulated and excessive. For banks, this represented a big and steady income that funded issues like free checking accounts and rewards applications.
The interchange payment was capped at a really low charge for banks with over $10 billion in belongings. The loophole, nevertheless, lay within the exception that explicitly excluded any financial institution with lower than $10 billion in belongings from the payment cap.
These small, “Durbin-Exempt” banks may nonetheless cost the outdated unregulated payment.
Fintech startups, seeking to construct low-fee or no-fee shopper merchandise, rapidly realized the chance. Firms like Chime and Money App quickly began to associate with these small banks to have the ability to subject their very own debit playing cards.
The associate financial institution would obtain the excessive interchange income and share it with the FinTech firm. This vital income stream allowed FinTechs to supply fee-free accounts as a result of they earned a lot from the shared swipe charges.
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“Traditional banks couldn’t compete. They were Durbin-regulated, earning half the interchange per transaction. Meanwhile, neobanks partnered with community banks and built billion-dollar businesses on the spread. The playbook: distributor captures value, shares it with customers,” Taylor wrote on X.
An analogous sample is now rising with stablecoins.
Will Banks Resist or Adapt?
The loophole within the GENIUS Act for stablecoin distributors allows a robust new enterprise mannequin that gives a built-in funding supply for brand spanking new opponents. Consequently, innovation outdoors of the standard banking system will speed up.
On this case, crypto exchanges or fintech startups are free of the associated fee and complexity of a banking constitution. As a substitute, they deal with consumer-facing features like consumer expertise and market progress.
Distributors’ earnings from the yield handed all the way down to them from stablecoin issuers allows them to supply extra enticing buyer rewards or fund product improvement. The result’s an objectively higher, cheaper, and sooner product than the deposits offered by legacy banks.
Although these banks might achieve closing this loophole with the upcoming market construction invoice, historical past suggests one other hole will inevitably seem and gas the following wave of innovation.
As a substitute of preventing this new construction with regulatory resistance, the smarter long-term technique for established banks could also be to adapt and combine this rising infrastructure layer into their operations.
