While the GENIUS Act was designed to prevent stablecoin issuers from transforming into shadow banks by prohibiting direct yield payments, a glaring loophole has emerged that threatens to render the July 2025 legislation functionally useless.
Major banking groups, including the Bank Policy Institute and American Bankers Association, have formally petitioned Congress to close this regulatory gap before it destabilizes the entire financial ecosystem.
The loophole operates with breathtaking simplicity: while stablecoin issuers cannot directly pay yields, nothing prevents their affiliates or partner exchanges from doing so.
The regulatory gap allows third-party platforms to offer what issuers cannot—yield payments that circumvent the law’s intent entirely.
Platforms like Coinbase and Kraken openly market yield programs for USDC holdings, creating what amounts to interest-bearing stablecoins through creative corporate structuring. This arrangement transforms regulatory compliance into an exercise in semantic gymnastics—technically legal, yet completely contrary to the Act’s intent.
Banking groups warn that widespread adoption of these yield-bearing arrangements could trigger deposit outflows approaching $6.6 trillion, fundamentally undermining the traditional banking model.
Such massive capital flight would inevitably constrict credit availability, forcing banks to reduce lending capacity precisely when American families and businesses need access to capital.
The prospect of deposit flight during economic stress presents an existential threat to institutions that have anchored the financial system for generations.
The regulatory ambiguity surrounding third-party affiliates creates fertile ground for arbitrage, potentially encouraging further creative interpretations of the law.
Other jurisdictions, especially Hong Kong, have explicitly banned yield-bearing stablecoin issuance to prevent securities classification complications—a more thorough approach that American regulators might consider emulating.
What makes this situation particularly concerning is how stablecoin issuers can market yield offerings transparently while maintaining legal cover through intermediary structures. This regulatory theater exploits the fact that stablecoins are typically non-interest bearing by design, making any yield arrangements inherently suspicious and potentially destabilizing.
This regulatory theater allows them to capture the economic benefits of deposit competition while avoiding direct regulatory oversight.
The current framework fundamentally permits shadow banking through proxy arrangements, defeating the GENIUS Act’s primary purpose. These arrangements between issuers and exchanges present greater deposit flight risks that particularly threaten financial stability during economic downturns. The GENIUS Act requires dual licensing options for issuers at either federal or state levels, yet this jurisdictional flexibility may inadvertently enable regulatory shopping for more permissive interpretations of yield restrictions.
Unless Congress acts swiftly to clarify the scope of prohibited yield payments, the legislation risks becoming another example of financial regulation that sounds impressive in theory but proves ineffective against determined market participants wielding creative legal interpretations.
