On July 18, after more than a decade of legal uncertainty, US lawmakers finally brought part of the crypto industry into the regulatory fold. The newly signed Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act requires issuers of stablecoins—cryptocurrencies that claim a value tied to a more stable asset—to fully back their tokens with cash or short-term Treasury bonds, submit to audits, and follow anti-money-laundering rules, among other conditions. In an effort to cement stablecoins as a form of “digital cash” rather than a place to park money, the law also bars stablecoin issuers from paying interest.
But crucially, the law doesn’t ban crypto exchanges from offering customers rewards on their stablecoin holdings, meaning stablecoin holders are still able to receive financial incentives that look a lot like interest. Today, Coinbase customers can earn a 4.1 percent annual reward if they hold a stablecoin called USDC on the platform. The return is similar to what customers might expect from a high-yield savings account.
Banking industry groups say this represents a major regulatory loophole and could push people to take their money out of banks and put it in crypto exchanges, which continue to be far less regulated. Some crypto exchanges offer higher rewards than what’s available from a high-yield savings account (while rates vary, many offer an annual yield of 4.25 percent). Kraken, for example, promotes 5.5 percent “rewards on your USDC holdings.”
Even without rewards, stablecoins pose a potential risk for consumers compared to bank deposits and cash. Unlike checking or savings accounts, cryptocurrencies are not FDIC-insured, meaning that if a stablecoin issuer collapses, the US government won’t directly step in to make consumer deposits whole.
Some regulators and crypto advocates say the GENIUS Act’s stringent reserve requirements and bankruptcy protections obviate the need for FDIC insurance. But stablecoins have collapsed in the past, and research from the Bank for International Settlements (BIS) suggests that even the “least volatile” stablecoins, like the ones now the standard under GENIUS, “rarely trade exactly at par” to the value they claim to have. This brings into question “stablecoins’ ability to serve as a reliable means of payment,” BIS researchers write.
Research from the Federal Reserve Bank of Kansas City suggests increased demand for stablecoins could have knock-on effects for the economy. “If stablecoins are purchased out of bank deposit accounts, that necessarily means that there are less funds available for banks to loan,” says Stefan Jacewitz, assistant vice president of the Kansas City Fed. He says incentives like rewards “could induce shifts in funding that are faster and larger than they would have been otherwise.”
In April, the Treasury Department released a report suggesting consumers may move as much as $6.6 trillion out of bank deposits and into stablecoins, partially as a result of the GENIUS Act. If that happens, it could reduce the funds banks have available to lend, and consumers and businesses may face higher borrowing costs in the long run, according to research by the American Bankers Association, a prominent industry group.
Crypto advocates see things differently. They claim stablecoin rewards create healthy market pressure and could drive big banks to provide more competitive interest rates in an effort to keep customer deposits.
“To call this a trillion-dollar fight would be an understatement: This is highly fraught territory that banks have jealously guarded,” says former Republican representative Patrick McHenry of North Carolina, who served as chair of the House Financial Services Committee until January 2025.
A study commissioned by Coinbase predicts a maximum decrease in banks’ deposits of 6.1 percent. Looking at community banks specifically, the report does not find a statistically significant effect on deposits under what it sees as likelier market-growth projections for stablecoins. Meanwhile, Dante Disparte, chief strategy officer and head of global policy at Circle, the issuer of USDC, has written that “today's generation of successful stablecoins have increased dollar deposits in the U.S. and global banking system,” adding that the prohibition on interest from stablecoin issuers represents “a measure that would protect the deposit base.”
The Compromise
In the four years it took to push stablecoin legislation over the finish line, most lawmakers in Congress agreed that stablecoin issuers should not pay interest. “The drafters understood that [stablecoins are] a different kind of instrument: digital cash, a digital dollar, not a security instrument that provides a return,” says Corey Then, deputy general counsel of global policy at Circle.
In March, Coinbase CEO Brian Armstrong weighed in. On X, he suggested customers should be allowed to earn interest on stablecoins. He likened the arrangement to “an ordinary savings account, without the onerous disclosure requirements and tax implications imposed by securities laws.”
The rest of the story—as told by Ron Hammond, who recently worked as a senior lobbyist on behalf of the Blockchain Association, a prominent crypto industry group—goes something like this: Eventually, the banking industry agreed to a deal, which included the sought-after prohibition on stablecoin issuers paying interest. But the provision still left some room for crypto exchanges to provide users with a monetary incentive for holding stablecoins. Hammond says some crypto companies had hoped interest would be explicitly allowed, but prominent crypto groups were willing to agree to a compromise.
“The world of crypto, at the very least, was successful in getting language that opens the door for them to provide some type of reward that either is yield or something that resembles yield,” says McHenry, the former chair of the House Financial Services Committee, who now serves as the vice-chair of Ondo, a blockchain-focused financial markets company.
The fact that banking industry groups are now sounding the alarm about stablecoins frustrates some crypto industry experts. “Raising concerns about stablecoin rewards at this stage feels disingenuous and overlooks the extensive debate that shaped the GENIUS Act,” says Cody Carbone, CEO of the Digital Chamber, a crypto-focused advocacy and lobbying group. “Banking industry representatives were fully engaged throughout the process, alongside crypto stakeholders, and the final language, which permits stablecoin-related rewards offered by exchanges and affiliated platforms, was a direct product of those discussions.”
A Second Chance
The crypto industry might have been willing to compromise in part because it didn’t want to expend too much political capital on a bill it viewed as a test case for broader crypto regulation. “The concern for the crypto industry was, ‘If we start having hiccups with the stablecoin bill—the easy bill—the odds of us getting past it significantly go down, and then the odds of us getting to the market structure bill are near zero for these next two years,’” Hammond says.
The bill he is referring to is what’s known as the CLARITY Act, which attempts to create a regulatory framework for products and financial platforms operating on the blockchain, much like the laws already governing traditional financial entities like stock markets, banks, and institutional investors. The act has passed in the House; a Senate version of the bill is expected in September. Days after the GENIUS Act was signed, Senate drafters of the CLARITY Act published a request for information that asks whether legislation should limit or prohibit systems like stablecoin rewards.
The CLARITY Act gives both the crypto and banking industries a second chance to push through provisions that did not make it into the GENIUS Act. Paul Merski, executive vice president of congressional relations for the Independent Community Bankers of America, community banks’ primary lobbying and advocacy group, says the ICBA will fight any language that threatens “the underlying premise of not paying interest”—which he claims the GENIUS Act provided. “We addressed it in the bill that addressed stablecoin issuers, and we'll make sure it's addressed in the market structure legislation as well, so it doesn't create a loophole,” he says.
“Here's the problem with having two legislative packages move at different speeds: The losers in the last round will come back for another round, and the winners will have to relitigate,” says McHenry. “So we're back for round two, where everything is relitigated from round one. It makes round two more difficult.”
As the CLARITY Act moves through Congress, banks are also making their own public moves into stablecoins. Citigroup and Bank of America have signaled that they may issue their own stablecoins. Meanwhile, PNC Bank and JPMorganChase have launched partnerships with Coinbase. In JPMorgan’s case, this partnership allows customers to directly link their bank accounts to their crypto wallets as soon as next year.
JPMorgan is also piloting a “deposit token” system, which features much of the same technology as stablecoins without the need to shore up the token’s reserves at a 1:1 ratio, which is a requirement for stablecoins under the GENIUS Act. Ultimately, if the CLARITY Act results in a ban on stablecoin “rewards,” banks may regain the upper hand in the possibly multitrillion-dollar fight over deposits and the interest rates accompanying them.
“The banking trades clearly missed it and GENIUS got past them, and they rarely let something like that happen,” McHenry says. “I think they're back: They're back in a hardcore way, and the stakes are high.”
