While Congress crafted the GENIUS Act to prevent stablecoin issuers from directly paying yields to token holders, lawmakers apparently overlooked the crypto industry’s remarkable talent for regulatory arbitrage—leaving a loophole so expansive that US banking groups now warn of potential $6.6 trillion in deposit outflows from traditional banks.
The legislative gap proves elegantly simple: while stablecoin issuers cannot directly offer yields, nothing prevents affiliated platforms or third-party partners from doing so on their behalf. This creative interpretation allows companies like Coinbase and Kraken to reward users who park stablecoins on their exchanges, effectively circumventing the Act’s intent through what amounts to regulatory sleight of hand.
The crypto industry’s gift for regulatory arbitrage transforms legislative constraints into creative opportunities through strategic partnership structures.
The Bank Policy Institute, American Bankers Association, and Consumer Bankers Association have collectively sounded alarms about this arrangement, which they argue creates an unconscionably uneven playing field. Traditional banks, constrained by deposit rate regulations and reserve requirements, find themselves competing against stablecoin platforms offering attractive yields with considerably fewer restrictions—a contest roughly equivalent to bringing a compliance manual to a crypto party.
Treasury estimates suggest this loophole could trigger deposit outflows reaching $6.6 trillion, a figure that would fundamentally reshape American banking. Such massive liquidity shifts threaten the deposit base banks rely upon for credit creation, potentially constraining lending capacity and increasing borrowing costs for businesses and consumers alike.
The ripple effects could prove profound: tighter credit availability, reduced economic growth, and disrupted financial intermediation channels that have anchored the economy for generations. Stablecoins are designed to provide blockchain efficiency while maintaining price stability, making them attractive alternatives for institutions seeking both technological benefits and predictable values.
Banking executives warn that rapid deposit drainage during financial stress could create systemic vulnerabilities, particularly when stablecoin yields attract capital seeking higher returns than traditional savings accounts. The competitive pressure forces an uncomfortable choice: either banks adapt to this new reality or risk watching their deposit franchises erode as customers migrate toward more lucrative digital alternatives.
Despite these concerns, the current stablecoin market represents just approximately $280 billion compared to the $22 trillion US dollar money supply, suggesting the threat may be more about future growth potential than immediate disruption.
Pending regulatory guidance aims to close this loophole, though whether regulators can successfully plug holes in legislation designed to govern an industry that treats regulatory boundaries as creative challenges remains an open question. The outcome will likely determine whether traditional banking maintains its central role in American finance or yields ground to its digitally native competitors.
