Congress has long recognized that stablecoins should not function as unregulated bank deposits. The intent of the recently enacted GENIUS Act is clear: to prohibit stablecoin issuers from paying interest or yield to holders, maintaining a distinction between payment instruments and bank deposits which are not only used for payment purposes but also as a store value.
Yet loopholes have already emerged. Some crypto exchanges and affiliated platforms now offer “rewards” to stablecoin holders that work much like interest, potentially undermining the stability of the traditional banking system and constraining credit in local communities.
Terminology matters. Credit card rewards are funded by interchange fees and paid to encourage spending — you earn points for using your card. Stablecoin “rewards” are different. They’re funded by investing the reserves backing stablecoins, typically in Treasury bills or money market funds, and passing that interest income to holders. You earn returns for holding the stablecoin, not for using it. Economically, this is indistinguishable from a bank deposit paying interest.
When a platform advertises “5% rewards” on stablecoin holdings, it’s generally backing those tokens with Treasuries yielding about 4.5%, then passing that yield to users. Whether labeled rewards, yield or dividends, the function is the same: interest on deposits. Banks perform a similar activity — taking deposits, investing in loans and paying depositors a return — but face far higher costs, including FDIC insurance, capital requirements and compliance obligations that stablecoin issuers largely avoid.
This dynamic has a precedent. In the 1970s and early 1980s, Regulation Q capped bank deposit rates at 5.25% while inflation and Treasury yields soared above 15%. Money market funds filled the gap, offering market rates directly to consumers. Deposits fled smaller banks, which lost their funding base, while large money-center institutions gained reserves. The result was widespread disintermediation, the collapse of the savings and loan industry and the farm-credit crisis of the 1980s.
Stablecoin “rewards” risk repeating that history. Just as money market funds exploited the gap between regulated deposit rates and market rates, stablecoin platforms exploit the difference between what banks can profitably pay and what lightly regulated issuers can offer by passing through Treasury yields with minimal overhead.
Some ask why banks can’t just raise deposit rates. The answer lies in structure. Banks operate under a fundamentally different business model and cost framework. They pay FDIC premiums, maintain capital reserves and comply with extensive supervision — costs most stablecoin issuers don’t bear. Banks also use deposits to make loans, which requires holding capital against potential losses. Stablecoin issuers simply hold reserves in ultra-safe assets, allowing them to pass through nearly all the yield they earn.
To match 5% “rewards,” banks would need to earn 6% to 7% on their loan portfolios — an unrealistic target in today’s environment, especially for smaller community banks. The consequence is not fair competition, but a structural disadvantage for regulated depository institutions.
The Consumer Bankers Association warns this loophole could trigger a massive shift of deposits from community banks to global custodians. Citing Treasury Department estimates, the Association notes that as much as $6.6 trillion in deposits could migrate into stablecoins if yield programs remain permissible. Because the GENIUS Act’s prohibition applies narrowly to issuers, exchanges and intermediaries may still offer financial returns under alternate terminology. This opens the door to affiliate arrangements that replicate the essence of interest payments without legal accountability.
Those reserves don’t stay in local economies. The largest stablecoin issuers hold funds at global custodians such as Bank of New York Mellon, in money market funds managed by firms like BlackRock or — if permitted — directly with the Federal Reserve. When a community-bank depositor moves $100,000 into stablecoins, that capital exits the local bank and concentrates at systemically important institutions. The community bank loses lending capacity; the megabank or the Fed gains reserves. The result is disintermediation with a concentrated risk profile reminiscent of the money-market fund crisis.
The Progressive Policy Institute estimates that community banks — responsible for roughly 60% of small-business loans and 80% of agricultural lending nationwide — could be among the most affected. In Louisiana, where local banks finance small businesses and family farms, that risk is especially relevant. If deposits migrate to unregulated digital assets, community-bank lending could tighten, particularly in rural parishes and underserved communities.
Research from the Brookings Institution reinforces the need for regulatory parity. The label “rewards” doesn’t change the fact that these payments are economically interest. Allowing intermediaries to generate yield without deposit insurance or prudential oversight could recreate vulnerabilities similar to those seen during the 2008 money market fund crisis.
To preserve financial stability, policymakers should move to close the stablecoin-interest loophole. Clarifying that the prohibition on interest applies to all entities— not just issuers — would uphold Congress’ intent. Regulators such as the Securities and Exchange Commission, Commodities Futures Trading Commission and federal banking agencies could also treat “reward” programs as equivalent to deposit interest for supervisory purposes.
Stablecoins offer genuine efficiencies in payments, but unchecked yield features risk turning them into unregulated banks. History shows what happens when regulatory arbitrage allows competitors to offer deposit-like products without oversight: deposit flight, institutional instability and capital flowing away from community lenders. Acting now could help sustain stability, protect depositors and preserve the credit channels that support community lending — especially in states like Louisiana, where community banks remain the backbone of Main Street.
In late October and early November 2025, usage of the Federal Reserve's Standing Repo Facility
(SRF) reached elevated levels exceeding $50 billion at month-end -- the highest utilization since
March 2020. Simultaneously, the Overnight Reverse Repo (ON RRP) facility has collapsed to
approximately $24 billion, down from peak levels exceeding $2 trillion in 2023. This
combination signals structural stress in U.S. money markets extending beyond seasonal factors.
These two facilities serve opposite functions in the Fed's monetary policy framework. The SRF is
an emergency lending facility where banks can borrow reserves overnight by pledging Treasury
or agency securities as collateral, paying the SRF rate (currently 4.50%). It acts as a ceiling on
overnight rates. The ON RRP works in reverse: money market funds and other institutions lend
cash to the Fed overnight, earning the ON RRP rate (currently 4.30%). It provides a floor on
rates.
The depletion of ON RRP removes a critical shock absorber. When the facility held trillions in
2021-2023, it functioned as a deployable liquidity reservoir. During stress events, as repo rates
in private markets rose above the ON RRP rate, money market funds would withdraw their cash
from the Fed and deploy it into higher-yielding private repo markets. This automatic flow of
liquidity would stabilize rates without Fed intervention. With ON RRP now depleted to $24
billion, this reservoir is empty. When liquidity shocks occur, there is no pool of cash to flow into
stressed markets. Instead, all pressure falls directly on bank reserves, currently at
approximately $2.8 trillion. The elevated SRF usage indicates that despite aggregate reserves
appearing adequate, banks are unable to efficiently reallocate liquidity across the system.
The core problem is that banks with surplus reserves face prohibitive costs to intermediating
due to post-2008 regulations, particularly the Supplementary Leverage Ratio (SLR) and G-SIB
capital surcharges. The SLR requires capital against all balance sheet assets, including reserves.
For a large bank to lend $1 billion overnight, it expands its balance sheet by that amount,
increasing SLR denominators and potentially triggering higher surcharge brackets. The capital
costs of holding additional assets on the balance sheet often exceed repo market spreads,
rendering arbitrage unviable. Banks with surplus reserves therefore park them at the Fed rather
than lending to institutions that need them.
Current conditions reveal that while dealer behavior around period-ends follows established
patterns, the magnitude of rate effects has grown substantially. Recent Federal Reserve
research documents that SOFR rose as much as 25 basis points above the ON RRP rate at recent
quarter-ends, far exceeding the 5-10 basis point moves typical in 2017. The Fed's analysis
attributes this to "growing tightness in the repo market and a diminishing elasticity of supply
and demand" as reserves decline. Critically, the research shows that dealer quarter-end
behavior -- reducing triparty borrowing and shifting to central clearing -- has remained
"remarkably stable," yet rate impacts have intensified. This indicates the problem is not
changing behavior but deteriorating underlying conditions. The pattern mirrors 2018-2019,
when similar dynamics preceded the September 2019 crisis. Academic work from that episode
documented that foreign banks reached minimum reserve levels while domestic G-SIBs
maintained surpluses but declined to intermediate due to balance sheet constraints.¹
November 2025 differs critically from September 2019: the ON RRP buffer is now depleted. In
2021-2023, that buffer absorbed surpluses and prevented repo rate collapse. Its near-zero level
means the system lacks this stabilizer precisely when QT has reduced reserves and Treasury
issuance remains elevated. Additional liquidity pressure falls directly on reserves, leaving repo
markets vulnerable to quarter-end dynamics, tax payments, or Treasury settlement volatility.
Chairman Powell announced that QT will slow dramatically, with Treasury runoff ending while
mortgage-backed securities continue maturing. However, this addresses only aggregate levels,
not the structural issues driving period-end stress. The question remains whether current
reserve levels are sufficient given elevated post-pandemic deposits, outstanding credit line
commitments, tighter balance sheet constraints, and the expired Bank Term Funding Program.
What do these signals indicate? Three interpretations emerge. The most likely is that quarterend and month-end rate effects will continue intensifying as reserves decline further, with the
spread between SOFR and ON RRP at period-ends serving as a barometer of underlying
tightness. Federal Reserve research suggests that as Treasury issuance continues and reserves
decline, "the repo market is likely to tighten further and the effects of quarter- or month-ends
on repo rates may grow, providing another potential indicator that reserves are becoming less
abundant." This would manifest as larger SRF usage at period-ends and persistent elevated Fed
facility usage, though system functioning would remain generally stable between these events. A more adverse interpretation sees a triggering event during an already-stressed period-end
causing broader repo market seizure, forcing the Fed to resume asset purchases and confirming
that meaningful balance sheet normalization is impossible under current structures. An
optimistic interpretation requires regulatory reform -- SLR exemptions for reserves or changes
to quarter-end reporting requirements -- to reduce incentives for balance sheet window
dressing, though this appears politically unlikely.
For banks, the implication is that reserve buffers need to be higher than pre-2019 benchmarks,
and the ratio of demandable claims to liquid assets requires closer monitoring. For investors,
continued volatility in short-term interest rates should be expected, particularly around periodends. The Fed's weekly H.4.1 release tracking SRF and ON RRP levels provides leading
indicators. Money market fund flows have outsized impact as their allocation decisions directly
affect system liquidity buffers.
The transformation underway represents a fundamental shift from bank-intermediated to
partially Fed-intermediated money markets. Post-2008 regulations strengthened individual
bank resilience but broke private intermediation chains. The central bank now serves as both
lender and borrower of last resort, with private markets unable to efficiently connect flows.
September 2019, March 2020, March 2023, and November 2025 episodes demonstrate a
pattern: reserves appear adequate until buffers thin, after which modest events trigger
outsized disruptions.
1. Bostrom, E., Bowman, D., Rose, A., and Xia, A. (2025), "What Happens on Quarter-Ends
in the Repo Market," FEDS Notes, Board of Governors of the Federal Reserve System;
Copeland, A., Duffie, D., and Yang, Y. (2021), "Reserves Were Not So Ample After All,"
Federal Reserve Bank of New York.
2. Du, W. (2022), "Bank Balance Sheet Constraints at the Center of Liquidity Problems,"
Jackson Hole Economic Symposium.
Hurricane Melissa has rapidly intensified into a monster Category 5 storm threatening Jamaica and the Caribbean, LSU hurricane expert Jill Trepanier is available to provide expert insight and interviews.
Trepanier specializes in hurricane climatology and the estimation of risk using statistical methods. Currently, she uses this information to estimate risk to cultural heritage institutions, Native American sites, and coastal fisheries. She also assists in environmental science education development through the implementation of weather stations and real-time data to K-12 classrooms in South Louisiana.
Trepanier can speak on the following topics:
Why monster storms like Hurricane Melissa are becoming more common – How climate change and ocean warming fuel stronger, longer-lasting hurricanes in the Gulf and Atlantic. The science behind rapid intensification – What drives a storm to explode from mild to catastrophic strength in less than a day. When hurricanes stall — the hidden danger – Why slower-moving storms can cause record-breaking rainfall and inland flooding. Mapping the coast’s future risk – Using climate models and extreme-value statistics to identify which Gulf and Atlantic regions face the highest hurricane threat. Building resilience before the next big one – Turning hurricane risk data into smarter coastal planning, infrastructure design, and emergency response. Understanding the probability of extreme wind and surge events – What the data reveal about the odds of another Hurricane Melissa—and how those odds are shifting. The human cost of storm uncertainty – How better hurricane modeling and communication can save lives by improving public understanding of risk.
