The GENIUS Act includes an important rule: stablecoin issuers are prohibited from directly paying interest to holders. Formally, this was done to protect banks from deposit outflows, but in practice — an unexpectedly profitable regulatory loophole has opened up.
Now, crypto exchanges and fintech platforms can take the yield from such stablecoins for themselves, turning it into a driver for new products and innovation.
How the ban on stablecoin yield is bypassed
One of the most controversial points of the GENIUS Act was the ban on paying interest to stablecoin holders. Essentially, this cements their status as a means of payment, not a savings instrument capable of competing with bank accounts.
This point is seen as a concession to the banking lobby — it was added so the law could pass at all. But in practice, stablecoin distributors quickly found a loophole and are now actively using it.
Only issuers can be prohibited from paying yield, not third parties — for example, crypto exchanges. And this is where the scheme lies. The issuer (like Circle or Tether) earns income from reserve assets, such as US Treasury bonds. Then part of this profit is passed to the distribution platform, which pays users higher yields.
A vivid example is Coinbase. The exchange receives a share of the income collected by issuers like Circle, and uses it to attract users. Today on Coinbase you can hold USDC or USDT with a yield of 4.1% per annum.
For banks, this is a real threat: users get better terms and through much more convenient interfaces. It’s no surprise that the banking sector has already started to openly complain about this.
Banks warn of mass deposit outflows
In August, the Bank Policy Institute appealed to Congress to tighten stablecoin regulation. Right now, the US is discussing a bill on the structure of the crypto market.
“If the ban does not extend to exchanges that effectively act as distribution channels for stablecoin issuers or their affiliated companies — the provisions of the GENIUS Act are easily circumvented by paying interest to holders indirectly,” the letter says.
Bank deposits will suffer the most. According to a US Treasury estimate published in April, stablecoins could lead to an outflow of up to $6.6 trillion from deposit accounts. And if you consider that distributors can now legally pay yield, this figure could be even higher.
For banks, this is critical, since deposits are the main source of funding for issuing loans. And if there is less money in accounts — banks’ ability to lend to the economy also decreases.
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Nevertheless, this is not the first time banks have faced a threat to their position.
The GENIUS Act follows in Durbin’s footsteps
According to fintech expert Simon Taylor, the situation around the GENIUS Act repeats what happened with the Durbin Amendment in 2011. Then, as now, a loophole in the law gave non-bank players a powerful advantage.
Congress passed the amendment to lower the fees that stores paid to banks when paying by debit card. Before that, fees were high and unregulated — for banks, it was a stable source of income that paid for free accounts and bonus programs.
The amendment set a strict cap on fees for banks with assets over $10 billion. But the law made an exception: small banks with fewer assets were not subject to the cap and could continue to charge the full rate.
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Fintechs quickly noticed this loophole. Companies like Chime and Cash App began to massively partner with such small “Durbin-Exempt” banks to issue debit cards.
The partner bank collected inflated fees and shared the profits with the fintech. This money allowed startups to offer free accounts.
“Regular banks couldn’t compete, their fees were half as much. And neobanks teamed up with regionals and built billion-dollar businesses. The scheme is simple: the distributor receives income and shares it with users,” Taylor wrote.
Now, a similar scenario is unfolding with stablecoins.
Will banks resist or start adapting?
The loophole in the GENIUS Act gives stablecoin distributors a powerful business model: a steady stream of income from issuers becomes the basis for competing with banks. This accelerates the development of new solutions outside the traditional financial system.
In such conditions, crypto exchanges and fintech startups do not need to obtain a banking license. They focus on the user, interfaces, and growth. And the interest passed on from the issuer allows them to invest in development and offer more generous terms to clients.
As a result, we get a product that beats bank deposits on all counts: faster, cheaper, and more convenient.
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Banks, of course, may try to close this loophole through a future crypto market structure law. But history shows that one scheme is quickly replaced by another. The launch of a new wave of innovation is only a matter of time.
Instead of once again running into regulatory resistance, banks should consider a different approach — integrating this new infrastructure into their operations. This could be far more forward-thinking than fighting what cannot be stopped anyway.
