The recently enacted GENIUS Act of 2025 is already facing significant challenges, with major U.S. lenders issuing a dire warning about its potential to destabilize the banking system. At the heart of the controversy is a critical loophole in the Act's stablecoin regulations, which banks argue could lead to a massive outflow of deposits and fundamentally reshape the financial landscape.
The Looming Threat of Shadow Banking
The core issue stems from the GENIUS Act's ban on stablecoin issuers paying interest, a rule that banking groups claim is being circumvented by their affiliate companies. These crypto exchanges are reportedly offering high-yield rewards on stablecoins, effectively operating as "shadow banks" that traditional savings accounts cannot match. The Bank Policy Institute (BPI) and other banking coalitions have alerted Congress that this loophole could trigger a "deposit migration" of an estimated $6.6 trillion from the U.S. banking system. Such a shift wouldn't just impact bank balance sheets; it threatens to reduce the availability of credit for critical sectors like mortgages, business loans, and farm financing across the nation.
Call for Comprehensive Regulatory Clarity
The banking industry's concerns highlight the narrow focus of the GENIUS Act, which primarily targets stablecoins without comprehensively addressing the broader competitive landscape of payment mechanisms. Experts, like Douglas Holtz-Eakin of the American Action Forum, advocate for a "Clarity Act" — a holistic regulatory framework that would place all traditional and digital payments and assets on an equal footing. This approach would level the playing field, fostering fair competition while ensuring consumer protection across the entire financial ecosystem. With the stablecoin market cap already exceeding $317 billion, largely driven by these attractive yields, the decision facing Congress is critical. The current situation presents a pivotal moment for financial regulation. If Congress chooses to close the loophole, stablecoins may revert to their original purpose as simple payment tools, potentially losing their appeal as high-return investment alternatives. Conversely, allowing the loophole to persist risks embedding a parallel crypto shadow banking system within the financial architecture. The ultimate decision will determine whether the billions currently held in stablecoins remain a draw for high yields or if the era of unregulated crypto shadow banking truly comes to an end.
