As Congress prepares to return from its winter recess, negotiations over another round of legislation to regulate the crypto industry are heating up. Whether Republicans and Democrats on the Senate Banking Committee can reach an agreement remains an open question. That is unfortunate, because among the issues that still need to be addressed, one of particular importance is the impact of crypto on lending to underserved communities.
Rural areas, inner cities, and economically disadvantaged communities rely heavily on community banks, typically defined as those with less than $1 billion in assets, for access to capital, credit, and basic financial services. Lawmakers on both sides of the aisle have long recognized this reality, which is why despite partisan differences they have supported initiatives such as the New Markets Tax Credit to expand capital and credit in underserved areas.
Protecting this lifeline of credit and capital is also a key reason behind the prohibition on stablecoins offering interest to customers, enacted as part of the GENIUS Act.
The GENIUS Act is the first major U.S. law focused on the regulation of payment stablecoins. Its purpose is to enhance consumer protection, promote innovation, create confidence in the stablecoin marketplace, and protect the financial system. To that end, the law includes several guardrails, including provisions intended to limit the migration of deposits from traditional banks into stablecoins.
Why is Congress concerned that stablecoins could diminish the traditional banking sector?
First, payment stablecoins are, by law, not traditional deposits and therefore face significantly lighter regulation. If they were allowed to accrue interest, they would more closely resemble deposit accounts, but without the prudential oversight that protects consumers and the broader financial system. Bank deposits are insured up to $250,000 by the Federal Deposit Insurance Corporation, while stablecoins are not. If consumers were to use stablecoins as a primary savings vehicle, they would have no such protection should an issuer fail.
Second, competition in the depository marketplace is already intense. Nearly 9,000 banks and credit unions currently operate in the United States, though that number has declined in recent years due to consolidation and shifting demand. At the same time, the growth of nonbank financial institutions has further reduced demand for insured depository institutions.
Third, the authors of the law sought to ensure that traditional depository institutions, which remain a primary source of lending to communities, small businesses, and homeowners, continue to have access to a large and cost-effective supply of funding in the form of deposits.
Despite these efforts to protect commercial banks and credit unions from competition with a significantly less regulated stablecoin sector, crypto companies are already devising ways to skirt the prohibition on offering yield.
For example, some firms, including Coinbase, are exploring programs that provide “rewards” to stablecoin holders, emphasizing that these payments are not technically interest and are offered for reasons other than merely holding the stablecoin. Coinbase already advertises a 4.10% reward rate for customers holding USD Coin, or USDC. A Treasury report from April 2025 estimates that increased stablecoin usage, particularly if issuers are able to offer yields comparable to bank accounts, could lead to $6.6 trillion in deposit outflows, a roughly 36% decline in total bank deposits.
A contraction of that magnitude would be devastating for community lending. Community banks use deposits to originate approximately 60% of all small business loans and 80% of agricultural loans nationwide. Banks are also subject to the Community Reinvestment Act, which requires them to lend, invest, and provide basic banking services in underserved communities. Stablecoin issuers face no comparable obligation.
Some Senators recognize this problem and are pushing to close the rewards loophole. Others, including Senator Alsobrooks, are working toward a bipartisan compromise that would at least narrow it. Her proposal would allow exchanges to pay rewards on transactions conducted with dollar-pegged stablecoins, while prohibiting rewards on tokens simply sitting idle in a digital wallet. While not a perfect solution, it would meaningfully reduce the risk of deposit flight.
In the coming weeks, Congress has an opportunity to address several shortcomings in the GENIUS Act. Closing the stablecoin yield loophole should be at the top of the list.
