The GENIUS Act Banned Yield on Stablecoins- But Banks Are Still Losing Against The Competition

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Oh, the GENIUS Act! A piece of legislation born from the desperate cries of the banking sector, as though it were their last beacon of salvation. With its key rule banning stablecoin issuers from paying any interest directly to holders, the act appeared to be a noble attempt to protect the beleaguered banks from the growing wave of competition. However, like all great laws, it birthed unintended consequences – a loophole ripe for exploitation.

The rule was intended to safeguard the banks from a potential exodus of deposits, but, alas, it has inadvertently opened the gates for crypto exchanges and fintech distributors to harvest profits from this very flaw. With a swift sleight of hand, the yield has found its way into the pockets of those who dare to play the game, creating a new avenue for innovation.

The Art of Bypassing the Stablecoin Yield Ban

Ah, but here’s the twist, my dear reader. While the GENIUS Act bans stablecoin issuers from offering yield, it does not extend that ban to third parties. Like crypto exchanges, who can now legally pay interest on stablecoins, while the issuers remain blissfully innocent in their role. What an exquisite loophole! A loophole that would make even the most cunning of politicians blush.

The crypto exchanges, with their boundless ambition, have seized upon this oversight. They stand ready to capture the yield from the underlying reserves-say, US Treasury Bills-and funnel it directly into the pockets of those daring enough to hold USDC or USDT on their platforms. Take Coinbase, for instance, a company that gleefully offers users a handsome 4.1% annual percentage yield, the kind of yield that traditional banks can only dream of. All this, without breaking a sweat or needing to sign any dreary banking charter. It’s an innovation, some would say a revolution, in the financial sector.

The bank lobby is furious about stablecoin yield under the GENIUS Act. They’re calling it a “loophole” that needs closing.

But here’s what they’re missing: We’ve seen this movie before. And it built an entire generation of fintech companies.

🧵

– Simon Taylor (@sytaylor) October 5, 2025

The issuer, having earned its interest from the likes of US Treasury Bills, passes that yield down the chain to the distributor. And lo and behold! The distributor, not bound by the rules that govern the issuer, is free to offer generous rewards to the users who trust their stablecoins to their platform. It’s a win-win, if you’re in the right business, that is.

The Bankers’ Nightmare: The Bank Deposits Flight

Now, brace yourselves, for the banks are wringing their hands in despair. Their precious deposits are leaking away like water through a sieve. In August, the Banking Policy Institute, ever the voice of reason, urged Congress to tighten up the stablecoin regulations. They begged, pleaded, and probably threw in a few theatrical gasps, all to prevent the exodus of deposits to crypto exchanges.

“Without an explicit prohibition applying to exchanges, which act as a distribution channel for stablecoin issuers or business affiliates, the requirements in the GENIUS Act can be easily evaded and undermined by allowing payment of interest indirectly to holders of stablecoins,” the letter read.

Can you hear it? The panic in their voices? The report from the Treasury Department paints a grim picture: up to $6.6 trillion in deposits could vanish, spirited away by the crypto sirens. And as third-party distributors sweeten the deal with interest payments, the flight of deposits is only set to accelerate. An existential crisis for the banks, no doubt. But fear not, for the drama has only just begun.

The bank lobby already got itself a ban on yield-bearing stablecoins to protect its regulatory moat for deposits.

Now the banks are shaking in their boots about reward programs. Apparently stablecoins are only ok if holders get literally nothing.

You don’t hate TradFi enough.

– Jake Chervinsky (@jchervinsky) September 11, 2025

Because, you see, without deposits, banks cannot issue loans, and without loans, they cannot keep the entire banking machinery churning. It’s a simple but profound truth. But let’s not forget that the banks have faced similar challenges before. Ah, history has a way of repeating itself, doesn’t it?

History Repeats Itself: The 2011 Durbin Amendment

Simon Taylor, ever the oracle, points out the similarities between the GENIUS Act loophole and the 2011 Durbin Amendment. Ah, the sweet taste of déjà vu! You may recall that the Durbin Amendment sought to cap the fees merchants paid when customers used debit cards. For banks, this was a revenue stream as reliable as the sunrise, funding everything from free checking accounts to those charming rewards programs.

However, there was a clever loophole. Banks with less than $10 billion in assets were exempt from the fee cap, a gift that didn’t go unnoticed. Fintech startups, those crafty innovators, partnered with these “Durbin-Exempt” banks to issue their own debit cards. The result? Banks were forced to face off against a new wave of low-fee, no-fee competitors, all of whom were reaping the benefits of the unregulated fees. Sound familiar?

“Traditional banks couldn’t compete. They were Durbin-regulated, earning half the interchange per transaction. Meanwhile, neobanks partnered with community banks and built billion-dollar businesses on the spread. The playbook: distributor captures value, shares it with customers,” Taylor wrote on X.

And now, it seems we are witnessing a replay of this very drama. Stablecoins, once thought of as mere tools for payment, have become the new frontier in the battle for financial supremacy. Who will emerge victorious? Only time will tell.

Will Banks Adapt or Fight?

The loophole in the GENIUS Act may be a temporary inconvenience for the banking industry, but it has already unleashed a wave of innovation. The new model-one where distributors earn income from the yield and pass it down to customers-has the potential to revolutionize the entire sector.

Crypto exchanges and fintech startups, unencumbered by the need for a banking charter, are free to focus on the user experience and market growth. They can offer higher rewards, better products, and faster services than the traditional banks could ever dream of. The legacy system is in jeopardy, and yet, it seems that even the banks are beginning to realize it. Will they resist? Or will they adapt?

One thing is certain: history is on the side of innovation. And though banks may succeed in closing this loophole with the new market structure bill, we all know that where there’s a will, there’s a way. The battle between traditional finance and the new wave of fintech is far from over. In fact, it may just be beginning.

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2025-10-07 00:43