Congress took an important step this year to bring digital assets into the mainstream economy. By passing the GENIUS Act, lawmakers created for the first time a federal framework for payment stablecoins that recognizes their growing role in commerce and establishes regulatory clarity to promote innovation and economic growth. In an effort to establish clear rules and distinctions, key provisions in the law are intended to draw an important line between stablecoins and traditional banking products, both to protect consumers and our financial system.
However, that distinction is already being tested, as some intermediaries are offering reward structures that mirror interest payments despite the law’s clear prohibition on interest-bearing payment stablecoins. The incentives may be framed as “rewards” or cash back, but clever terminology aside, the implication is clear – a glaring loophole in the GENIUS Act is undermining Congress’s intent. If left unchecked, these arrangements could function as a form of shadow deposit taking and could threaten the very economic growth and innovation the law sought to encourage.
The risk is not hypothetical. Projections show that broad adoption of interest-bearing stablecoin products could draw trillions of dollars out of the traditional deposit system if consumers move their money into these platforms without understanding the risks involved. While the “rewards” offered to consumers may be tempting, these products lack the same protections – like FDIC insurance – that back up traditional banks. Consumers could be irreparably harmed if an issuer were to go bankrupt.
Concerningly, the damage could extend far beyond individual consumers. Community banks in particular are at significant risk of disruption. These institutions act as a critical source of lending for small businesses and local employers. However, this all depends on a stable base of deposits. A significant outflow would reduce available credit and amplify funding stress throughout local communities.
Congress is currently deliberating on crypto market structure legislation – this gives lawmakers an important opportunity to establish regulatory clarity that promotes innovation and growth, both in our financial system and on Main Street. That means addressing the current loophole that allows intermediaries to offer “reward” programs that are interest in everything but name.
If Congress fails to act, it risks undermining the engine of America’s economy – small businesses. Community banks supply over 60 percent of small business loans and nearly 90 percent of small-dollar farm loans, supporting entrepreneurs across sectors as they create jobs, drive innovation, and stimulate local economies. In fact, small businesses support nearly half of America’s private sector employment and over 43 percent of America’s GDP.
Ending the uncertainty and establishing clear rules of the road in the stablecoin market is necessary to maintain America’s competitive edge. Digital assets will continue to evolve, and the United States should remain a leader in financial innovation. But we shouldn’t let loopholes and unclear regulations threaten a key part of our economy’s foundation. Our elected officials can reaffirm the intent of the GENIUS Act by ensuring that interest restrictions apply to all intermediaries and that consumer-facing reward programs cannot be used to circumvent the law and blur the line between stablecoins and traditional deposits.
