Major US banking associations are warning lawmakers that a loophole in the recently passed GENIUS Act could destabilise the financial system and spark a mass flight of deposits from traditional banks. The American Bankers Association, Bank Policy Institute, and Consumer Bankers Association have issued a joint warning that the legislation, while designed to regulate stablecoins, could inadvertently allow crypto exchanges to offer yield on them.

The groups argue that while the Act bars stablecoin issuers such as Circle and Tether from paying interest directly, it leaves open the possibility for platforms like Coinbase and Binance to step in. If crypto firms begin rewarding holders of stablecoins such as USDC and USDT, banks claim the effect could be catastrophic: up to $6.6 trillion in deposits might exit the banking system, according to a recent US Treasury estimate.

The ‘Loophole’ at the Centre of the Dispute

The heart of the controversy lies in the GENIUS Act’s ban on issuers paying interest, without extending the same restriction to exchanges and intermediaries. Banking lobbies insist this loophole would give digital asset platforms an unfair competitive advantage, encouraging consumers and businesses to move money into high-yield stablecoins instead of bank deposits.

Such a shift, they warn, would undermine financial stability, particularly in times of stress when depositors already tend to withdraw funds quickly. Reduced deposits would limit banks’ lending capacity, drive up borrowing costs, and ultimately hit small businesses and households who rely on affordable credit.

For Wall Street, this risk is existential. Banks argue that if yield-bearing stablecoins become mainstream, they could siphon off liquidity at a scale not seen before, threatening their ability to fund the wider economy.

Wall Street Versus Crypto

The row highlights the growing rivalry between traditional finance and the crypto sector. On one side are the entrenched banking lobbies fighting to protect deposit bases; on the other are exchanges and digital asset firms pushing for wider adoption of stablecoins and blockchain-based finance.

Crypto firms have been quick to dismiss the warnings. The Crypto Council for Innovation and the Blockchain Association argue that the banking industry is more concerned with protecting balance sheets than consumers. Coinbase’s chief legal officer, Paul Grewal, labelled the concerns an attempt to shield incumbents from competition, stressing that lawmakers and the President have already rejected such protectionist measures.

Adding to the tension is the perception of a new “Operation Choke Point” a coordinated attempt by banks and regulators to limit crypto adoption. While banks warn of systemic risk, digital asset advocates insist the resistance is simply a bid to slow down innovation.

White House and Federal Reserve Tilt Towards Digital Assets

The political context is equally significant. President Donald Trump has publicly aligned himself with digital assets, presenting himself as a pro-crypto ally. Treasury Secretary Scott Bessent has also suggested that stablecoins could serve as major buyers of US government bonds, potentially supporting the Treasury market.

The Federal Reserve recently eased its specialised crypto supervision programme, lowering barriers for banks to experiment with digital assets. Fed Governor Christopher Waller echoed this stance, declaring that smart contracts, tokenisation, and distributed ledgers could become part of everyday transactions.

These moves signal a shift in Washington’s attitude. Analysts view the policy change as bullish for crypto markets, suggesting that the White House favours fostering innovation over defending legacy players.

The Road Ahead

Despite the aggressive lobbying from banking groups, crypto platforms continue to expand across the US and Europe. Coinbase, Binance, and others are building services around stablecoins, tokenised securities, and digital custody solutions. Even traditional financial institutions are experimenting with blockchain-based offerings, aware that resisting outright may leave them behind.

The fight over the GENIUS Act is therefore about more than a single piece of legislation. It reflects a deeper struggle for control over the future of money, deposits, and lending in the US. Whether lawmakers amend the Act to close the alleged loophole, or allow exchanges to move ahead with yield-bearing stablecoins, the decision could reshape the competitive landscape for decades.