Community banks are pushing for limits on interest-bearing stablecoins.

• Interest-bearing stablecoins are causing concern among community banks.
• The GENIUS law may divert local deposits.
• Regulatory debate on stablecoin yields

Community banks in the United States have once again warned Congress about potential loopholes in legislation regulating stablecoins, with a particular focus on tokens that offer some type of yield to holders. The discussion gained momentum after the advancement of the so-called GENIUS Act, passed during the summer, which still leaves room for interpretation regarding reward programs linked to stablecoins.

In a letter recently sent to the Senate, the Community Banking Council of the American Banking Association advocated for adjustments to the legislation to avoid negative impacts on the local banking system. According to the group, the absence of clear limits for yield-generating stablecoins could encourage the migration of traditional deposits to crypto platforms, reducing the resource base used by community banks to grant loans.

Bankers argue that deposits are essential for financing small businesses, farmers, students, and homebuyers. The council believes that allowing cryptocurrency companies to offer attractive yields without restrictions would create unfair competition with regulated institutions.

"If billions are withdrawn from community bank loans, small businesses, farmers, students, and homebuyers in cities like ours will suffer."

the council stated in the letter.

The debate over interest-bearing stablecoins has divided banks and cryptocurrency industry representatives over the past year. Banking entities argue that existing prohibitions against direct interest payments are too lenient and do not prevent the creation of indirect yield mechanisms. In a message sent "to bank CEOs," ABA President Rob Nichols stated that this "loophole" could lead to the diversion of trillions of dollars in deposits from the traditional banking system.

"Lawmakers need to understand the very real risks to local communities in their state if they allow this loophole to be exploited."

Nichols said. On the other hand, associations linked to the crypto sector reject this interpretation. In a letter previously sent to parliamentarians, the Blockchain Association argued that restricting rewards in stablecoins could "weaken competition in payments and financial services, harm regulatory clarity, and reopen an already established law."

The group also challenged the idea that interest-bearing stablecoins threaten community banks.

“Independent analyses show no disproportionate outflows of deposits related to the adoption of stablecoins, and banks currently hold trillions of dollars in interest-earning reserves at the Federal Reserve, rather than being used for lending.”

the organization stated.

The controversy is expected to resurface in the coming weeks, when senators discuss a broader bill to regulate the cryptocurrency market. In this context, the treatment of yield-generating stablecoins is likely to become one of the central points of the regulatory debate.