GENIUS Act’s Critical Flaw Uncovered: A Direct Threat to Local Bank Lending Dynamics
Local banks face a lending crunch as a legislative oversight in the new crypto framework takes aim at their core business model.
The Regulatory Blind Spot
Buried within the celebrated GENIUS Act—the legislation hailed for finally bringing clarity to digital assets—lies a provision that quietly reshuffles the deck. It doesn't just create rules for crypto; it inadvertently strips traditional lenders of a key advantage. The act's narrow definition of 'qualified collateral' sidelines certain bank-held assets, pushing liquidity toward new, tech-first financial channels. Think of it as building a highway for digital finance but forgetting the on-ramps for Main Street.
Why Your Community Bank Might Start Saying 'No'
The mechanics are brutally simple. By favoring blockchain-native assets and tokenized securities as prime collateral, the act forces a recalculation of risk. Assets that once secured a small business loan now carry less weight on the balance sheet. For local banks operating on thin margins, this isn't an innovation headache—it's a capital adequacy crisis. The result? Tighter credit, higher rates for local ventures, and a slow bleed of deposits to platforms offering yield on those now-preferenced digital assets. Another case of regulators solving for Wall Street's future while undermining Main Street's present.
The Finance Sector's Ironic Pivot
Here's the twist: the very institutions threatened by this flaw are now racing to adopt the tech that bypasses them. To compete, banks must tokenize their own loan books or partner with crypto-native firms—essentially funding their own disruption. It's a cynical but familiar finance dance: if you can't beat the new rules, repackage your old product to look like you invented them. The GENIUS Act may have aimed to protect consumers, but its first major impact is forcing a high-stakes game of adapt-or-die onto the lenders they still rely on. The future of finance is here, and it's holding local lending hostage.
GENIUS Act flaw threatens local banks’ lending dynamics
Back in July, I voted NO on the GENIUS Act because it contained a back door to a central bank digital currency (CBDC).
Back then Johnson promised conservatives that he WOULD put Tom Emmer’s bill, that closed the loophole to CBDC, in the NDAA to get our vote on Trump’s bill, the… https://t.co/EHvpwgE9v8
— Former Rep. Marjorie Taylor Greene🇺🇸 (@RepMTG) December 9, 2025
The group also believes that changing the flaw in the legislation could impact local banks’ ability to lend money and provide loans to their users. The Bank Policy Institute stated in August that the result will be greater deposit flight risk, especially in times of stress. The firm noted that a reduction in credit supply at banks could lead to higher interest rates, fewer loans, and increased costs for businesses.
The community of bankers acknowledged that the stablecoin legislation was not perfect from a community bank perspective, but a valid effort to bring regulation into the stablecoin market. However, the council believes that the bill’s restrictions on interest payments limit the new payment market from competing with bank deposits and also disrupts community-based lending in the industry.
ABA stated that removing interest payments in the GENIUS Act could incentivize customers to put all their funds in stablecoins. The council pointed to the U.S. Treasury’s estimation that about $6.6 trillion in bank deposits are at risk due to the interest payment limitations in the legislation.
“This was no loophole, and you know it. 376 Democrats and Republicans in the House and Senate rejected your unrestrained effort to avoid competition. So did one President. It’s time to MOVE on.”
–Paul Grewal, Chief Legal Officer of Coinbase.
The group of more than 200 community bank leaders believes that some firms have exploited a perceived loophole and might disrupt the entire community bank lending industry. The council argued that digital asset exchanges and stablecoin issuers are not designed to fill the lending gap, and that they will also not be able to offer FDIC-insured products.
Some digital asset exchanges, including Coinbase and Kraken, already offer rewards to stablecoin holders. ABA plans to put a prohibition on stablecoin issuers that provide interest in the crypto market legislation.
The council also sought to change the supposed loophole in the legislation through a letter to lawmakers in August 2025. The Crypto Council for Innovation and the Blockchain Association stated in a letter to the Senate Banking Committee the same month that stablecoin payments are not meant to fund loans. They also agreed that the revision in the stablecoin bill would stifle innovation and consumer choice.
The Bank Policy Institute argued that, despite the GENIUS Act, illicit actors still have opportunities to exploit digital assets and the U.S. financial system. The firm believes that illicit actors could use unhosted and internationally hosted wallets to evade detection and access the U.S. financial system.
FDIC approves GENIUS Act application procedures for regulatory-approved banks
The Federal Deposit Insurance Corporation (FDIC) Board approved a proposal to implement the application of the stablecoin legislation on December 16. The agency confirmed that the bill allows financial institutions to issue stablecoin payments through a subsidiary and to engage in related activities.
The FDIC also maintained that a regulatory-approved U.S. bank seeking to issue stablecoin payments via a subsidiary is required to apply to the regulatory body to be approved as a legitimate stablecoin issuer. The agency added that the legislation requires it to receive and review applications, as well as to issue implementing regulations for the application process.
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