Congress faces pressure from banking organizations to address and erase 'loopholes' within the GENIUS Act
The GENIUS Act, enacted on July 18, 2025, sets strict regulations for payment stablecoins in the United States. One of the key provisions of the Act is the prohibition of stablecoin issuers from offering indirect payments or incentives to coin holders, such as interest, dividends, or staking rewards.
Payment stablecoins, which are cryptocurrency tokens backed by real-world assets like U.S. dollars or Treasuries on a 1:1 basis, have gained traction in the FinTech world. Retailers and payment services have adopted stablecoins, issuing their own branded stablecoins for customer payments to save on traditional banking and payment processor costs.
However, the GENIUS Act aims to prevent stablecoins from acting like unregulated banks and destabilizing the financial system. The prohibition on indirect payments is a critical aspect of this regulation.
Potential Risks and Implications
The prohibition on indirect payments and incentives carries several potential risks and implications:
- Regulatory non-compliance and penalties: Issuers offering indirect incentives could violate the GENIUS Act, risking fines and imprisonment for up to five years, as these features could be viewed as unauthorized banking-like activities.
- Consumer protection and financial stability concerns: Indirect payments could blur the distinctions between stablecoins and bank deposits, potentially misleading consumers about the nature and safety of stablecoins.
- Impact on monetary policy and banking system: Offering incentives on stablecoins akin to bank deposit interest could compete directly with banks, affecting deposit flows and bank funding models.
- Limitations on market innovation: The Act’s restrictions limit issuer flexibility to design incentive structures, potentially limiting stablecoin appeal to customers used to interest-bearing bank deposits.
- Enhanced operational controls: The Act requires issuers to maintain operational soundness and reserves 1:1, minimizing risk of redemption failures even without incentives.
Impact on Traditional Bank Deposits
Musheer Ahmed, founder of FinStep Asia, stated that the threat of stablecoins to traditional bank deposits is relatively low due to lack of trust among retail users. Ahmed believes that crypto lending will likely make up for any deposit shifts away from traditional banks. However, this contrasts with the warnings issued by bank groups about deposit flight risk.
Without an explicit ban on such arrangements, the payment of interest or earnings on stablecoin deposits could encourage consumers and businesses to shift savings from traditional bank accounts to stablecoin accounts, potentially draining banks of capital. Arrangements between stablecoin issuers and affiliates or exchanges, when jointly and explicitly marketed to consumers, could undermine the GENIUS Act's prohibition regarding the payment of interest and yield.
In conclusion, the GENIUS Act's prohibition on indirect payments or incentives for stablecoin holders is a critical measure aimed at mitigating risks of consumer confusion, regulatory arbitrage, and financial instability associated with stablecoins mimicking banking functions. Any issuer attempting to provide such incentives would face significant legal and regulatory consequences.
- Fintech companies have increasingly turned to payment stablecoins, tokens backed by real-world assets, for retailer and payment service usage, aiming to save on traditional banking and payment processor costs.
- The GENIUS Act, enacted in 2025, seeks to regulate payment stablecoins and prevent them from acting like unregulated banks, thus destabilizing the financial system.
- One key provision of the Act prohibits stablecoin issuers from offering indirect payments or incentives to coin holders, such as interest, dividends, or staking rewards.
- Despite the potential low threat of stablecoins to traditional bank deposits due to lack of trust among retail users, the payment of interest or earnings on stablecoin deposits could encourage consumers and businesses to shift savings, potentially draining banks of capital if not properly regulated.
- Research indicates that the GENIUS Act's restrictions limit issuer flexibility to design incentive structures, potentially diminishing stablecoin appeal to customers accustomed to interest-bearing bank deposits.
- In the realm of finance and technology, crypto investments, fintech innovations, and AI applications play a significant role in shaping business strategies and market dynamics, making the correct implementation of regulatory acts like the GENIUS Act crucial for a stable financial ecosystem.
