President Trump's commitment to establishing America as the global leader in cryptocurrency represents exactly the kind of policy for the United States to be at the forefront of this financial innovation that can provide a faster and cheaper method of transacting compared to existing alternatives.
This is demonstrated by the achievement of the GENIUS Act, signed into law by President Trump with strong bipartisan support, creating a regulatory framework for stablecoins. However, a loophole in its implementation threatens to provide a neutral competitive environment in which financial innovations compete. As Congress considers additional market structure legislation, they must act now to close this gap before it creates the kind of systemic distortions that does not benefit consumers.
The GENIUS Act prohibited stablecoin interest payments for obvious reasons. Traditional banks perform a vital economic function: they act as coordinating middlemen between lenders and borrowers by transforming short-term deposits into long-term productive capital deployment. This process of credit intermediation powers business expansion, home purchases, and the capital investments that drive the economy and productivity growth. Banks perform this function under strict regulatory oversight, including maintained capital buffers, and benefit from deposit insurance that prevents destructive bank runs.
Stablecoins serve an entirely different purpose. As payment instruments that are pegged to the dollar, they facilitate transactions and settlements. But they are not regulated as credit institutions and the distinct regulatory frameworks governing these different financial instruments reflect their distinct economic roles.
While the GENIUS Act prohibits stablecoin issuers from paying interest directly, it remains silent on affiliates and exchanges. Crypto companies have quickly moved to take advantage of this loophole, offering "rewards programs" that mimics interest payments.
The macroeconomic implications are significant. The Treasury Department's analysis suggests that as much as $6.6 trillion in deposits could migrate from traditional banks to stablecoins if these indirect interest payments continue. To put that in perspective, that represents nearly 30 percent of total bank deposits in the United States.
Recent economic research quantifies the lending impact of such deposit flight. Analysis from the Federal Reserve Bank of Kansas City indicates that each dollar moved from bank deposits to stablecoins reduces bank lending capacity by approximately 50 cents.
Reduced lending capacity of banks means higher interest rates for businesses seeking to invest in equipment and expansion, higher borrowing costs for families purchasing homes or financing education, and less credit availability for the entrepreneurs and small business owners who drive job creation and innovation. The economic efficiency gains from stablecoin payment systems would be vastly outweighed by the efficiency losses from constrained credit markets. Community banks would face disproportionate pressure. These institutions serve as critical sources of credit for small businesses and rural communities, areas often underserved by larger financial institutions.
Some argue this represents market competition and innovation but that ignores that true competition occurs on a level playing field with equivalent rules. Banks accepting deposits must maintain capital ratios, submit to rigorous examination, provide deposit insurance, and meet community lending obligations. Stablecoin exchanges offering economically equivalent products face none of these requirements. Although many like me believe bank regulations may well be excessive, few would claim no such regulations should apply to institutions offering credit services, including in crypto. To fix the loophole, Congress should extend the GENIUS Act's prohibition on interest payments to include any affiliate, exchange, or related entity that serves as a distribution channel for stablecoin issuers. This prohibition should encompass not just explicit interest, but any form of economic benefit tied to stablecoin holdings, whether called rewards, yields, or any other term.
This targeted correction preserves stablecoins' legitimate and important function as payment instruments while preventing them from becoming deposit substitutes without appropriate regulatory safeguards. By closing this loophole, Congress can cement America's position as the global leader in digital asset innovation, supporting innovation while protecting the financial foundations of American prosperity.
