Alec Gutierrez — The Guiding and Establishing National Innovation for U.S. Stablecoins Act (“GENIUS Act”), signed into law on July 18, 2025, seeks to strengthen the dollar’s reserve-currency dominance, protect consumers, and position the United States as the global leader in digital asset-regulation. The Act creates the first comprehensive federal framework for payment stablecoins by defining permissible issuers, imposing strict reserve requirements, and assigning supervisory authority. A payment stablecoin is defined as a “digital asset … designed to be, used as a means of payment or settlement[,]” and requires that such tokens be tied to a fiat currency (the U.S. dollar). However, Section 4(a)(11) of the Act has quickly become one of its most contested provisions. While the Act bars payment stablecoin issuers from paying any form of interest or yield to holders, it leaves open a “loophole” that allows exchanges, custodians, and other intermediaries to continue offering rewards programs. This unresolved regulatory tension has sparked an intense battle between banks and crypto platforms over the future of stablecoin competitiveness.
To set the stage, it is necessary to understand how the GENIUS Act classifies and regulates payment stablecoins. The Act not only requires that a payment stablecoin be tied to the U.S. dollar, but also mandates that it be fully backed by a 1:1 reserve of liquid assets, such as cash deposits and short-term U.S. Treasuries. The Act further states that no permitted payment stablecoin issuer shall be able to pay the holder any form of “interest or yield.” As a result, banks and other approved issuers may circulate their own stablecoins, but they cannot pass through the interest generated by their reserve portfolios. In practice, this means an issuer can create and sell a dollar-backed payment stablecoin, but it must keep all of the interest earned on the cash and short-term Treasuries held in reserve. Stablecoin holders receive none of that yield, even though the issuer earns it from the assets backing the coin.
The rewards “loophole” arises because the prohibition applies only to issuers, not to intermediaries. Crypto exchanges, custodians, and fintech platforms remain free to start indirectly offering stablecoin holders interest and rewards from tokens issued by third parties. This gap in the Act triggered pushback from the American Bankers Association, Bank Policy Institute, Consumer Bankers Association, and other banking lobbies. These groups have urged Congress to close the loophole, warning that third-party rewards could accelerate deposit flight, reduce bank credit creation, and heighten run risk. These concerns, however, require a closer look—particularly when analyzing the anticompetitive effects of a blanket prohibition on rewards and interest.
One of the anticompetitive effects of closing the loophole is that it would weaken the competitive pressure on banks to raise deposit rates. With interest rates increasing in recent years, banks in the United States have benefitted by earning higher returns on their loan portfolios and reserve assets while continuing to pay depositors annual rates of less than 0.01%. Analysts observe that if consumers shifted their deposits to institutions providing more competitive returns, including smaller banks that typically pass through a greater share of their earnings, households could regain tens of billions of dollars in otherwise foregone interest. Allowing exchanges to provide rewards or interest on stablecoins would pose a threat to banks’ interest rate arrangements, ultimately benefitting the consumer by offering them more competitive yield.
Although banks warn otherwise, research studies indicate that the potential for large-scale deposit flight—from allowing “independent platform-provided rewards”—is not a guaranteed outcome like the banks contend. An independent study conducted by Cornell University showed that fears of mass deposit outflows is “unfounded” because increased competition from these tokens would force banks to compete, requiring them to increase their deposit rates. History shows how the financial sector has evolved due to banks being repeatedly pressured to adapt and compete, as illustrated during the rise of the money-market mutual funds.
In the 1970s, money-market funds grew rapidly by offering cash-management tools and market-level returns due to federal caps on bank deposit interest. Instead of prohibiting this innovation, Congress took a pro-competitive approach and lifted the ceilings, enabling banks to compete for deposits. Here, closing the loophole and categorically banning rewards would suppress innovation and competition—a sharp contrast to Congress’s earlier decision to lift federal deposit-rate ceilings and allow banks to compete with money-market funds.
The GENIUS Act aims to bring stability to the stablecoin ecosystem but closing the rewards loophole risks doing so at the expense of competition and innovation. History shows that financial markets evolve through competitive pressure, not prohibitions, and the path Congress took with money market funds underscores that lesson. As policymakers revisit the Act, they should carefully consider whether closing the loophole would shift the power to shape this industry’s future away from consumers and toward incumbents.
