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Congress faces pressure from banking organizations to address and erase 'loopholes' within the GENIUS Act

Congress is being urged by the American Banking Association, the Bank Policy Institute, and various banking groups to strengthen the provisions of the GENIUS Act.

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Lawmakers Pressed by Financial Institutions to Close Perceived Flaws in the GENIUS Act Legislature
Lawmakers Pressed by Financial Institutions to Close Perceived Flaws in the GENIUS Act Legislature

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.

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