How a GENIUS Act ‘loophole’ could shift billions from banks to crypto

Key Takeaways

The GENIUS Act has sparked debate as stablecoins gain regulation, challenging traditional banks while driving global interest in digital finance. 

The recent passage of the GENIUS Act, which formally regulates stablecoins in the U.S., was welcomed by the crypto community, while traditional banks sounded the alarm.

Why are banks under pressure?

The GENIUS Act, designed to regulate the $288 billion stablecoin market, stirred concern among traditional banks.

Banking lobbies such as the American Bankers Association, the Bank Policy Institute, and the Consumer Bankers Association objected to what they described as a “loophole” in the law.

As per Financial Times, the act barred issuers from paying interest directly, and yet allowed third-party exchanges to offer yield on stablecoins from Circle or Tether.

Under the new rules, banks are permitted to issue their own stablecoins, but they cannot provide interest on these deposits.

This has led to concerns that crypto exchanges could attract customers seeking higher returns, drawing deposits away from traditional banks.

Déjà vu for deposit flight?

Ronit Ghose, Citi’s Head of Future of Finance, cautioned that the rise of higher-yielding alternatives, such as stablecoins, could spark a wave of outflows from traditional banks, echoing the money market fund boom of the late 1970s and early 1980s.

Back then, money market funds ballooned from $4 billion in 1975 to $235 billion by 1982, overtaking bank deposits as regulated interest rates made banks less competitive. 

Between 1981 and 1982 alone, bank withdrawals outpaced new deposits by $32 billion, according to Federal Reserve data.

Sean Viergutz of PwC shared similar concerns, warning that if exchanges begin offering attractive returns while banks remain constrained by interest rate caps, consumers may shift their funds en masse.

This could trigger large-scale outflows from the banking system.

Crypto voices see upside

However, crypto proponents see this development as a transformative opportunity.

Crypto entrepreneur and Bitcoin advocate Lark Davis noted that stablecoins have the potential to reshape finance, providing more adaptable and competitive options compared to conventional banking services.

He argues that rather than threatening the industry, stablecoins could push banks to innovate, creating a more dynamic financial ecosystem that benefits both consumers and institutions.

He said,

“People do not understand how the Genius Act changed the game. Stablecoins = smart contracts. And smart contracts run on Ethereum… and other L1s.”

Davis added, 

“For every dollar tokenized in the form of stablecoins, demand for ETH blockspace grows. That’s why institutions are stacking $ETH like their life depends on it.”

Stablecoin’s global race ramps up

Moreover, the push extended beyond the U.S. The Trump administration and Treasury Secretary Scott Bessent signaled that stablecoins might boost demand for U.S. bonds.

Meanwhile, U.K. industry leaders urged a national stablecoin strategy, and China explored yuan-backed tokens to strengthen its global role.

On top of that, as the U.S. advanced its regulatory framework, the competition to dominate digital payments intensified, underlining the transformative potential of stablecoins worldwide.