US banks are raising alarms over what they describe as a dangerous loophole in the recently passed GENIUS Act, warning it could trigger an unprecedented flight of deposits into the crypto sector. Traditional finance groups say the legislation, which is designed to regulate stablecoins, may inadvertently give exchanges such as Coinbase and Binance the ability to offer yield on stablecoin holdings, creating direct competition with bank deposits.
The warnings reflect a growing clash between Wall Street and the digital asset industry, as policymakers debate how to balance innovation with financial stability.
The “Loophole” in the GENIUS Act
The GENIUS Act, passed in July, introduced rules to oversee the issuance and management of stablecoins, digital tokens pegged to fiat currencies such as the US dollar. Crucially, the legislation prohibits issuers like Circle (USDC) or Tether (USDT) from paying interest directly to holders.
However, US banking groups argue that the law leaves a gap. They believe crypto platforms could step in to provide yield on stablecoins issued by third parties, effectively turning them into high-interest alternatives to bank deposits.
The American Bankers Association, the Bank Policy Institute, and the Consumer Bankers Association have all voiced concerns. They warn that if exchanges exploit this loophole, consumers could rapidly shift trillions in deposits out of traditional banks and into crypto-based accounts.
A Treasury Department analysis earlier this year estimated that up to $6.6 trillion could exit the banking system under such a scenario.
Why Banks Fear Deposit Flight
For banks, deposits are the backbone of their business model, underpinning lending, liquidity, and financial stability. A large-scale migration into stablecoins offering attractive yields could disrupt this foundation.
Banking lobbies argue that in times of stress, such outflows would amplify risks. Higher deposit flight would increase banks’ borrowing costs, reduce lending capacity, and strain credit availability for small businesses and households.
In effect, they say, yield-bearing stablecoins could destabilise the broader financial system, particularly during crises when depositors are already prone to move funds rapidly.
Wall Street vs Crypto: The Growing Divide
The debate highlights a deepening rivalry between Wall Street institutions and the crypto industry. While banks warn of systemic risks, crypto firms view the pushback as an attempt to stifle competition.
Coinbase’s chief legal officer, Paul Grewal, dismissed the banks’ claims as protectionist. He argued that both lawmakers and President Donald Trump had already rejected similar lobbying efforts. The Blockchain Association and the Crypto Council for Innovation have also pushed back, stating that further restrictions would unfairly tilt the playing field in favour of legacy finance.
The White House, meanwhile, has taken a more open stance towards digital assets. Treasury Secretary Scott Bessent has acknowledged the potential for stablecoins to become major buyers of US government bonds. Federal Reserve Governor Christopher Waller also signalled support, saying smart contracts, tokenisation, and distributed ledgers could be integrated into daily financial activity without fear.
The Fed recently loosened its specialised crypto supervision framework, lowering barriers for banks seeking to engage with digital assets, a move seen as aligning with the administration’s pro-innovation position.
What’s Really at Stake?
Behind the rhetoric, the dispute centres on the future role of stablecoins in the global financial system. As more consumers and businesses adopt them for payments and savings, stablecoins are cementing their place as a credible alternative to bank deposits.
Traditional institutions are not standing still. Many banks are experimenting with tokenised securities, digital custody, and even DeFi-inspired services. Yet gaps in infrastructure and persistent regulatory uncertainty continue to slow adoption.
Some analysts argue that the banking industry’s warnings are less about consumer protection and more about defending existing revenue streams. The spectre of a new “Operation Choke Point” this time aimed at large-scale crypto adoption – looms over the debate.
Innovation or Protectionism?
The fight over the GENIUS Act represents more than just a regulatory detail. It is a test of whether US financial policy will lean toward preserving the dominance of traditional banks or enabling open competition in the digital age.
If lawmakers side with banking lobbies, stablecoin growth could be constrained, keeping deposits within the legacy system. If the loophole remains, however, crypto platforms may gain a powerful tool to attract capital away from banks.
Either way, the clash signals a new phase in the competition between Wall Street and the crypto industry. With stablecoins at the centre of the debate, the outcome could shape the future of US deposits and the broader trajectory of financial innovation.
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