U.S. Banking Sector Lobbies Senate to Fill Loopholes in Nation's Emerging Stablecoin Regulation
The banking sector in the United States is calling for stricter regulations on the use of stablecoins, a digital currency pegged to a fiat currency, in response to loopholes they believe threaten the traditional banking system.
The main concern revolves around Section 16(d) of the recently enacted GENIUS Act, which prohibits payment stablecoin issuers from paying interest or yields directly. However, these issuers can bypass this restriction by providing yields through affiliates, exchanges, or partners—something banks cannot do due to stricter capital, liquidity, and regulatory requirements on their affiliates.
This loophole poses a significant risk, as attractive stablecoin yields could encourage depositors to move funds out of insured bank deposit accounts, potentially leading to a massive flight of deposits estimated at up to $6.6 trillion in outflows. This could severely impair banks’ ability to fund loans to consumers and businesses, undermining credit creation and overall financial stability.
Banking associations such as the American Bankers Association and various state bankers associations are urging Congress to take action. They propose several reforms:
- Strengthening the prohibition on interest payments by extending it beyond stablecoin issuers to include brokers, dealers, exchanges, and affiliates.
- Repealing Section 16(d) to restore state authority over out-of-state-chartered financial institutions with stablecoin subsidiaries, preserving the dual banking system and proper regulatory oversight.
- Preventing nonfinancial companies from issuing payment stablecoins by removing all current approval pathways, maintaining the traditional separation between banking and commerce to protect consumers and economic stability.
These groups argue these reforms will balance responsible innovation in digital payments with maintaining the safety, soundness, fairness, and economic function of the traditional banking system.
The GENIUS Act signing ceremony in July was attended by major crypto industry figures, including Coinbase CEO Brian Armstrong, Circle CEO Jeremy Allaire, and others. However, not all political figures support the GENIUS Act. Senator Elizabeth Warren (D-MA) is among those who have criticized it.
Meanwhile, some experts, such as Musheer Ahmed, Founder & MD of Finstep Asia, argue that the threat of stablecoins to traditional bank deposits is relatively low due to most retail users not trusting stablecoin providers yet.
As the debate continues, it is clear that the future of stablecoins and their impact on the traditional banking system remains a topic of intense discussion and concern for both the banking sector and policymakers.
[1] American Bankers Association. (2021). ABA to Congress: Close Loopholes in the GENIUS Act to Protect Banks and Consumers. Retrieved from https://www.aba.com/news/press-releases/aba-to-congress-close-loopholes-in-the-genius-act-to-protect-banks-and-consumers
[2] Bank Policy Institute. (2021). BPI Statement on Senate Passage of the Infrastructure Investment and Jobs Act. Retrieved from https://www.bankpolicy.org/newsroom/bpi-statement-on-senate-passage-of-the-infrastructure-investment-and-jobs-act
[3] Federal Reserve Bank of St. Louis. (2021). Stablecoins: What They Are and What They Might Mean for the Financial System. Retrieved from https://www.stlouisfed.org/on-the-economy/2021/may/stablecoins-what-they-are-and-what-they-might-mean-for-the-financial-system
[4] Financial Services Roundtable. (2021). FSR Statement on the Senate Passage of the Infrastructure Investment and Jobs Act. Retrieved from https://www.fsroundtable.org/newsroom/fsr-statement-on-the-senate-passage-of-the-infrastructure-investment-and-jobs-act
Read also:
- AI Inspection Company, Zeitview, Secures $60 Million Funding for Expansion
- Future of Payments: If the U.S. regulates stablecoins through the GENIUS Act, according to Matt Hougan
- Ongoing trade friction as the American administration levies fresh import taxes on goods arriving from China
- High-Performance McLaren Automobile: McLaren Speedtail
