Guy Fawkes 
Several major banking groups in the US have made a concerted effort to reach out to Congress regarding wording in the GENIUS Act that has created a stablecoin yield loophole.
The Bank Policy Institute (BPI) stated in a letter sent on 12 August 2025 to Congress that the existing language of the law allows stablecoin issuers to route yield through third-party exchanges or intermediaries.
The GENIUS Act, enacted on 18 July 2025 under the administration of President Trump, prohibits stablecoin issuers from directly offering interest or yield to token holders.
The fight between banks and stablecoin issuers is getting very interesting.
US banking groups think yield-bearing stablecoins will trigger $6.6 trillion outflows from the legacy banking system.
And this will “undermine credit creation,” leading to “higher interest rates, fewer… https://t.co/3LsuhDE91x
— Sayan (@Sayan_Web3) August 13, 2025
However, the legislation does not explicitly ban affiliated entities from doing the same on behalf of the issuers. This has raised concerns among major US banking associations, which put forward the notion that this loophole could be exploited to circumvent the spirit of the law.
Furthermore, the group has warned that allowing affiliated entities to offer yield on stablecoins could destabilise the US financial system and cited a US Treasury projection estimating that such practices might result in $6.6 trillion in deposit outflows from traditional banks.
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Large-Scale Shift To Stablecoins Could Drive Up Borrowing Costs
Banks have traditionally relied on deposits to fund their loans. However, they now run the risk of users parking their funds in yield-bearing stablecoins that could siphon those deposits away, potentially driving up borrowing costs for families and businesses alike.
In their letter to Congress, the banking groups have put their foot down and demanded that payment stablecoins should not offer interest in a manner indistinguishable from banks or money market funds that operate under strict regulatory oversight.
Unlike traditional financial (TradFi) institutions, stablecoin issuers do not lend or invest in securities to generate returns, fundamentally differing from TradFi bodies in their yield mechanism.
Still, the issue remains. Yield is one of the main drivers of stablecoin adoption. Stablecoin issuers have historically avoided paying interest directly. However, users can still earn returns via affiliated platforms.
Case in point, holding USDC on exchanges like Coinbase or Kraken can generate yield, positioning stablecoins as an enticing alternative to traditional savings accounts.
Banking groups argue that this dynamic introduces the risk of deposit flight, especially during periods of economic stress. As funds shift away from TradFi bodies, the resulting contraction in credit supply could result in higher interest rates, fewer loans and an increased cost of borrowing for everyday users.
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Coinbase And PayPal Still Offering Stablecoin Yield
While the stablecoin market is still modest compared to the $22 trillion US money supply, the US Treasury projects that it could balloon up to $2 trillion by 2028.
Currently, the global stablecoin market, valued at $280.2 billion, is dominated by Tether’s USDT and Circle’s USDC, accounting for over 80% of the total valuation, with Tether holding $165 billion and USDC holding $66.4 billion in circulation.
Meanwhile, in the backdrop of the banking groups petitioning Congress, Coinbase and PayPal, two of the largest US-based crypto firms, are progressing full steam ahead with their respective stablecoin reward programs.
Coinbase & PayPal found the GENIUS Act loophole! Both offering stablecoin “rewards” despite yield ban – Coinbase 4.1% on USDC, PayPal 3.7% on PYUSD.
Their defense: “We’re not issuers, we pay rewards not interest.” Critics say it weakens the law’s intent to separate…
— Dr Efi Pylarinou (@efipm) August 10, 2025
Executives from both companies have stated in their earnings calls that they plan to continue rewarding users who hold stablecoins on their platforms, with Coinbase CEO Brian Armstrong stating, “We are not the issuer. We don’t pay interest or yield—we pay rewards.”
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Key Takeaways
- TradFi bodies have petitioned Congress to resolve wording in the GENIUS Act, resulting in a stablecoin yield loophole
- Platforms such as Coinbase and Kraken give back rewards, prompting users to park their funds on their platforms rather than traditional deposits in a bank
- The stablecoin market could balloon up to $2trillion by 2028, underscoring its growing influence on global liquidity and financial infrastructure
The post US Banking Groups Petition Congress To Shut Down Stablecoin Yield Workaround appeared first on 99Bitcoins.
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