Key Takeaways:
- U.S. bankers demand that Congress remove this “specific” loophole from the GENIUS Act.
- This loophole could cause deposit outflows of over $6 trillion.
- The Treasury Department expects the stablecoin market to grow to $2 trillion by 2028.
Despite the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act. being signed into law by U.S. President Donald Trump last month, a coalition of banks formed by the nation’s most powerful banking group is criticizing a loophole that could trigger a multi-trillion-dollar outflow of deposits from the traditional banking sector.
In a formal letter to Congress on August 12, the Bank Policy Institute (BPI), along with the American Bankers Association, the Consumer Bankers Association, and others, urged Congress to take prompt action to alter the GENIUS Act.
The “Loophole” and the Risk of Deposit Flight
BPI’s primary issue is how yields will be issued to retail consumers. Currently, the GENIUS Act explicitly prohibits the companies that issue stablecoins from paying interest. However, the GENIUS Act fails to extend this prohibition to the issuers’ affiliates or key business partners, such as cryptocurrency exchanges. So in the future, exchanges can offer yields on the users’ stablecoin holdings. BPI expects that stablecoin issuers will take advantage of this loophole. Exchanges offer high yields to incentivize customers to hold stablecoins.
The banking industry is concerned that the widespread availability of high-yield stablecoins could make them more attractive than traditional high-interest savings accounts. According to the letter sent to Congress, they argue that this might result in a major outflow of capital from the banking sector. Citing an April U.S. Treasury assessment, the letter warns that the “deposit outflows risk” might be as high as $6.6 trillion.
Moreover, BPI strongly argues that the stablecoin issuers are not regulated similarly to highly regulated and supervised banks or money market funds; hence, offering yields through this particular legal loophole would not be deemed safe.
A Threat to the U.S. Credit System
The letter, which is addressed to Congress from the BPI, mentions severe consequences for the broader economy. Banks function as the powerhouse for economic growth by turning deposits into loans. However, when consumers are incentivized to park their deposits in exchanges due to higher yields from stablecoin issuers, this leads to lower credit supply into the banking system. Eventually, this will result in increasing lending costs and reducing loans to businesses and consumer households.
In their letter, they state that stablecoins are fundamentally different from bank deposits, as they do not fund loans that “power the economy”.
Market Context
While the potential for a $6.6 trillion shift is alarming, the current stablecoin market is still a fraction of the size of the U.S. money supply. As of June, the total market capitalization of stablecoins stood at approximately $280 billion, compared to the $22 trillion in the U.S. M2 money supply reported by the Federal Reserve. Tether (USDT) and Circle (USDC) dominate over 80% of the entire stablecoin market capitalization.
Nevertheless, the Treasury Department itself expects the stablecoin market to grow to $2 trillion by 2028. This rapid growth potential is possibly the reason why the banking industry has sent a letter to Congress to amend the stablecoin payment loophole to ensure credit flows to American businesses and individuals.
