What happened?
Major US banking associations are urging Congress to address a loophole in the GENIUS Act that they believe allows stablecoin issuers to offer yields indirectly through affiliates. This loophole could enable stablecoin providers to bypass restrictions on paying interest, which could disrupt traditional banking operations. The banks emphasize that stablecoins should not pay interest akin to highly regulated bank deposits or money market funds, as they don’t engage in lending or investment activities.
Who does this affect?
This affects banks, stablecoin issuers, and consumers who use stablecoins for financial transactions. Banks are concerned about the potential outflow of deposits as investors might shift to yield-bearing stablecoins. Stablecoin issuers like Tether and USDC may be impacted by any new regulations that tighten control over how they operate and offer incentives.
Why does this matter?
The shift toward yield-bearing stablecoins could trigger up to $6.6 trillion in deposit outflows from traditional banks, potentially impacting the broader financial market. Such outflows might lead to higher interest rates, reduced loan availability, and increased borrowing costs for businesses and households. Closing the regulatory gap is crucial to preventing disruptions in the financial system and maintaining stability in credit markets.