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.
