WASHINGTON—Community bankers are urging lawmakers to tighten restrictions on yield-generating stablecoins, warning that unclear limits could siphon deposits from local banks and reduce lending to small businesses and households, according to a new report.
In a letter sent this week to the U.S. Senate, the Community Bankers Council of the American Bankers Association revived concerns over how yield-bearing stablecoins are treated under federal law, The Block reported. The council said gaps remain in a stablecoin bill passed over the summer—known as the GENIUS Act—that could allow crypto firms to offer rewards or yields to stablecoin holders.
Those gaps, bankers said, could undermine the traditional deposit base that community banks rely on to fund loans in their local markets, The Block added.
“If billions are displaced from community bank lending, small businesses, farmers, students, and home buyers in towns like ours will suffer,” the council said in the letter, according to The Block.
Intensifying Debate
The debate has intensified over the past year as banks and the crypto industry clash over whether stablecoin issuers should be permitted to pay interest-like rewards, the report noted, adding that banking groups are arguing the summer legislation includes weak prohibitions against such practices, potentially making stablecoins more attractive as stores of value than traditional bank deposits.
In an email to bank chief executives, ABA President Rob Nichols described the provision as a loophole that could divert trillions of dollars away from the banking system, The Block reported.
“Lawmakers need to understand the very real risks to local communities in their state if they allow this loophole to be exploited,” Nichols said.
The Block’s analysis notes that crypto industry groups dispute those claims. In a letter sent to lawmakers last month, the Blockchain Association argued that prohibiting rewards on stablecoins would weaken competition in payments and financial services and reopen what it called settled law.
Idea Rejected
The association also rejected the idea that stablecoin rewards pose a threat to community banks, saying independent analysis shows no disproportionate deposit outflows tied to stablecoin adoption. Banks, it added, already hold trillions of dollars in reserves earning interest at the Federal Reserve rather than being deployed into loans, The Block noted.
Separately, PunchBowl News reported that treatment of yield-bearing stablecoins could be addressed in senators’ work on a sweeping bill to regulate the crypto industry at large. A group of senators is meeting on Tuesday to discuss that bill, according to PunchBowl News.
