The American banking establishment has discovered a new nemesis in the form of a regulatory loophole that allows stablecoin issuers to circumvent yield restrictions through their affiliated entities—a development that has prompted the Bank Policy Institute and American Bankers Association to sound alarm bells about potential deposit hemorrhaging.
The controversy centers on the GENIUS Act‘s somewhat selective enforcement mechanism, which explicitly prohibits stablecoin issuers from directly offering yield while remaining conspicuously silent about their affiliates and crypto exchanges doing precisely the same thing. This regulatory gap has created what amounts to a financial shell game, where stablecoin companies simply shift yield-offering responsibilities to their corporate cousins.
Banking groups have quantified their existential dread with a stark projection: $6.6 trillion in potential deposit outflows should this loophole remain unaddressed. To put this figure in perspective, such an exodus would fundamentally restructure the American credit system, potentially transforming banks from deposit-rich lending institutions into something resembling expensive middlemen with impressive marble lobbies.
The competitive imbalance strikes at traditional banking’s core function. While banks must navigate interest rate regulations and reserve requirements, stablecoin operators can effectively offer yield through affiliated exchanges that aggressively market these products to depositors seeking better returns. The shift away from traditional bank deposits could force institutions to seek more expensive funding sources, ultimately increasing lending costs for businesses and consumers across the economy.
The irony is palpable: instruments designed to maintain stable value are now being weaponized as yield vehicles that could destabilize the very system they purport to complement.
Current stablecoin market capitalization of $280.2 billion already represents a significant pool of funds operating outside traditional banking channels. Industry projections suggesting growth to $2 trillion by 2028 have banking executives contemplating scenarios where their deposit bases evaporate during financial stress periods—precisely when they need funding stability most. These arrangements could severely impair banks’ ability to maintain credit creation functions that support economic growth.
The legislative response involves lobbying for clarifying language that would extend yield prohibitions to stablecoin affiliates, effectively closing what banks view as regulatory arbitrage. This push reflects deeper concerns about equitable treatment: why should entities offering functionally similar services operate under different rules simply because they’ve structured their operations through technically separate corporate entities? The challenge mirrors broader regulatory uncertainty that financial authorities worldwide face when categorizing these hybrid instruments within existing legal frameworks.
The outcome will likely determine whether stablecoins become banking’s digital complement or its algorithmic replacement.
