Community Banks Demand Congress Kill ‘Backdoor’ Stablecoin Yields Before Jan 15 Markup
Ahead of the Jan 15 Senate markup, community bankers warn of a $6.6T deposit flight loopole in the GENIUS Act, while JPMorgan analysts dismiss the threat as exaggerated.
The uneasy truce between traditional lenders and the crypto sector fractured this week. Ahead of the critical Jan. 15 Senate markup on market structure, the American Bankers Association’s (ABA) Community Bankers Council fired a warning shot: close the "yield loophole" in the GENIUS Act, or watch $6.6 trillion in deposits exit the banking system.
The "GENIUS" Loophole
At the heart of the dispute is the Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act), signed in July 2025. While the law explicitly bans stablecoin issuers (like Circle or Paxos) from paying interest, it remains silent on third-party exchanges. Community bankers argue this regulatory gap allows platforms to offer "rewards" that function as de facto interest, siphoning capital away from insured deposits.
"Allowing inducements like interest or rewards on stablecoins could incentivize customers to move savings out of banks, jeopardizing the lending that fuels growth in towns across America.". This statement was issued in the ABA Community Bankers Council Letter to Senate
The ABA’s ultimatum is clear: extend the interest ban to all affiliates and partners, or risk a liquidity crunch for local mortgages and small business loans.
JPMorgan: The Bearish Counter-Narrative
While community lenders forecast a $6.6 trillion exodus, citing a 2025 Treasury report, institutional analysts are calling their bluff. JPMorgan research released this week downplayed the existential threat, projecting the total stablecoin market will likely cap between $500 billion and $600 billion by 2028.
The discrepancy reveals a sharp divide in risk assessment. For JPMorgan, stablecoins remain a transactional utility, comprising barely 7% of the crypto ecosystem. For community banks, they are an unregulated high-yield savings account competitor threatening their low-cost funding base.
The Jan. 15 Showdown
The Senate Banking and Agriculture Committees are set to mark up market structure legislation on Jan. 15. This session will determine if the GENIUS Act’s protections are tightened or if the "yield workaround" becomes a permanent fixture of the U.S. financial architecture. With over 200 bank leaders now on record opposing the current framework, the window for a legislative fix is closing rapidly.
