On August 12, a coalition of banking trade associations sent a joint letter to Congress warning that the recently enacted GENIUS Act contains a loophole that could allow the indirect payment of interest or yield on payment stablecoins. The Act (previously discussed here) establishes a federal regulatory framework for payment stablecoins, including restrictions on interest payments, limits on nonfinancial company issuers, and provisions affecting state-chartered institutions.
Under the Act, stablecoin issuers are barred from paying "any form of interest or yield ...solely in connection with the holding, use, or retention of depositors' stablecoins. This prohibition is intended to foreclose both pass-through yield models, such as sharing income from stablecoin reserve assets like Treasury bills, and traditional interest-bearing account structures. While benefits tied to a separate service could arguably fall outside the scope, regulators are expected to scrutinize workarounds and contractual arrangements that attempt to replicate yield.
The letter warned that certain provisions in the Act could be bypassed or weaken state oversight, creating risks for credit availability, consumer protection, and the structure of the U.S. financial system. The letter recommended the following changes:
- Extend the prohibition on interest payments. The GENIUS Act bars payment stablecoin issuers from paying interest or yield to holders, but the associations cautioned that exchanges, brokers, dealers, and affiliates could still offer these incentives. They argued that this loophole could divert deposits from banks, impairing credit creation, and undermining the law's intent.
- Restore state authority over out-of-state-chartered institutions. The letter called for repeal of Section 16(d) of the GENIUS Act, which permits certain uninsured, out-of-state-chartered entities to operate across state lines without host state approval. The associations asserted that this undermines the dual banking system and limits states' ability to supervise institutions serving their residents.
- Strengthen the prohibition on nonfinancial company issuers. While the GENIUS Act restricts public nonfinancial companies from issuing payment stablecoins, it provides exceptions and does not cover private nonfinancial companies. The associations urged Congress to eliminate all approval pathways and extend the prohibition to private nonfinancial entities, citing concerns over conflicts of interest and concentration of economic power.
Putting It Into Practice: The GENIUS Act was designed to create a consistent national framework for payment stablecoins while preserving key safeguards in the banking system. This coordinated request from the coalition of banking trade associations signals a strong industry push for additional legislative action. Stablecoin issuers, exchanges, and other market participants should monitor congressional activity closely, assess whether current practices align with the Act's policy objectives, and prepare for potential amendments affecting issuer eligibility, state-level authority, and permissible interest arrangements.
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