Over 200 US community banks seek help from Congress: Stablecoins are "stealing" their deposits

The American Community Bankers Association has recently taken significant action, directly writing to Congress to request amendments to the GENIUS Act. On the surface, it discusses the details of stablecoin regulation, but in essence, it reveals deep concerns from the traditional financial system about digital assets. Behind this conflict lies an interesting regulatory loophole and an ongoing reshuffle of financial power.

The Real Concerns of Community Banks

Representing over 200 bank executives, the Community Bankers Committee of the American Bankers Association has voiced their core demand: the current stablecoin regulatory framework has loopholes that need to be closed promptly.

The specific issues are:

• The GENIUS Act explicitly prohibits stablecoin issuers from paying interest or yields directly to holders
• However, the bill does not prohibit crypto exchanges from offering rewards linked to stablecoin holdings
• This creates a “workaround”—issuers do not pay interest, exchanges provide rewards, and the end result is effectively the same

Community bankers point out that major exchanges like Binance and Coinbase are operating in this gray area, distributing rewards to stablecoin users that essentially constitute “deposit-like earnings.” How threatening is this to them? According to warnings from the Bank Policy Institute led by Jamie Dimon, if stablecoin incentives are left unregulated, it could trigger a massive outflow of bank deposits worth trillions of dollars.

The banking logic is straightforward: local banks rely on deposits to lend to small businesses, farmers, students, and homebuyers. If large amounts of deposits flow into stablecoin platforms, their lending capacity will be weakened. Moreover, the key issue is that crypto platforms, which do not have banking licenses or FDIC insurance, are effectively competing in “deposit markets.” To bankers, this is unfair competition.

The Existence of a Regulatory Loophole

From a technical perspective, the community bankers’ concerns are not unfounded.

The original design logic of the GENIUS Act was to prevent stablecoins from siphoning funds from federally insured bank savings accounts. To achieve this, the bill explicitly bans stablecoin issuers from paying interest. But legislators clearly did not fully anticipate the creativity of exchanges—they are not issuers, but platforms that offer “rewards” or “loyalty programs,” not “interest.”

This loophole indeed exists and is being exploited. Recent reports indicate that leading US-based CEXs have explicitly stated they believe the bill prohibits issuers from paying interest, not exchanges offering rewards. This interpretation has some legal backing but is clearly exploiting a technicality in spirit.

Therefore, the Community Bankers Committee is urging Congress to extend the prohibition on “earnings” in the ongoing crypto market structure legislation to include affiliates and partners of stablecoin issuers. In other words, close this loophole.

Industry Pushback and Deeper Conflicts

The crypto industry will not sit idly by. The Blockchain Association and the Cryptocurrency Innovation Council have directly countered the banking sector’s logic:

• Stablecoins are not used for traditional credit expansion, so there is no “bank run” risk
• Overregulation could stifle innovation and limit consumer choices
• Leading US CEXs have explicitly stated that conflating the two undermines the legislative intent

However, this rebuttal has a flaw: while stablecoins are not directly used for credit expansion, they do attract capital flows. Reports show that Circle has received approval from a US national trust bank, and stablecoins are being integrated into the federal regulatory framework, indicating that stablecoins are indeed becoming part of the US financial system. Additionally, traditional financial institutions like PwC are accelerating their involvement, further confirming the genuine appeal of stablecoins.

From this perspective, the concerns of community banks are not entirely unfounded. Stablecoins, through exchange rewards, are indeed competing with bank deposits for user funds—just in a more covert manner.

Deeper Issues: Traditional Finance vs. Financial Innovation

This conflict reflects a deeper question: how should regulation balance when new financial tools (stablecoins) offer features that traditional finance (banks) cannot?

From the user perspective, the combination of stablecoins and exchange rewards is more attractive: 24/7 liquidity, higher yields, global accessibility. Traditional bank deposits, while insured by FDIC, tend to have lower yields and less liquidity.

From a financial stability standpoint, community bankers’ concerns are valid: if large amounts of funds flow into stablecoin platforms, the lending capacity of local banks could be impaired, potentially affecting small business financing.

Future Outlook

Based on current policy trends, this conflict is likely to intensify:

• The GENIUS Act has already passed a procedural vote in the Senate (66:32) and is moving into substantive stages
• Congress is advancing crypto market structure legislation, which may incorporate the community bankers’ concerns
• Stablecoin issuers and exchanges will continue seeking new incentives to circumvent regulation
• The outcome of this game will determine the role of stablecoins within the US financial system

Possible outcomes include tighter regulation without outright bans. More likely, legislation will clarify what constitutes “prohibited incentives” versus “permitted rewards,” aiming to strike a balance between innovation and stability.

Summary

This is not simply a regulatory vs. anti-regulation debate but a reflection of the traditional financial system’s deep concerns about emerging financial tools. The community bankers’ demands have some validity—stablecoins through exchange rewards do attract bank deposits. But the crypto industry’s perspective also makes sense—outright bans could stifle innovation.

The core issue is that the design of the GENIUS Act contains loopholes, and regulation needs to become more nuanced. The next phase of legislation will likely specify and define “incentives” more clearly and extend oversight to intermediaries like exchanges. This process will take time, but the direction is clear—stablecoins will be incorporated into a more rigorous regulatory framework, but not outright prohibited. For long-term investors optimistic about stablecoins, this is good news, as it will bolster market confidence in stablecoins.