Community Banks Demand GENIUS Act Amendment to Block Stablecoin Yield—Here’s Why It Matters

Small banks are pushing hard for a legislative change that could reshape the crypto landscape—and your wallet.

The GENIUS Act Gets a Banking Makeover

A coalition of community banks is lobbying Congress to amend the proposed GENIUS Act. Their goal? To explicitly prohibit stablecoins from offering any form of yield or interest to holders. They argue that yield-bearing stablecoins function like unregulated bank accounts, skirting traditional oversight and consumer protections. It's a move that pits legacy finance's gatekeepers against the decentralized ethos of crypto—where code, not a charter, governs returns.

Stablecoins: The New Savings Account?

For years, stablecoins were seen as simple digital dollars—a settlement layer. Now, protocols are leveraging them to generate yield through lending, staking, and DeFi strategies, offering returns that often dwarf traditional savings rates. Banks call this regulatory arbitrage; crypto advocates call it innovation. The proposed amendment aims to draw a bright line: a 'stablecoin' must be stable, not a yield-generating asset. It's an attempt to force crypto back into a box that traditional finance understands.

A Fight for Financial Territory

This isn't just about consumer protection—it's a turf war. Community banks, already squeezed by megabanks and fintech, view yield-bearing stablecoins as an existential threat. Why park cash at 0.5% APY when a decentralized protocol offers 5%? The amendment is a defensive play, an attempt to use regulation to stifle a competitor that operates outside their rulebook. After all, nothing unites traditional finance like a new, efficient profit model they can't immediately tax or control.

What's Really at Stake?

If the amendment succeeds, it could neuter a core value proposition for holding major stablecoins, potentially chilling innovation in DeFi. If it fails, it signals that crypto's parallel financial system can continue evolving—and competing—on its own terms. The outcome will hinge on whether lawmakers see yield as a dangerous loophole or the inevitable feature of a digital asset. One banker's 'prudent safeguard' is another's innovation-killing overreach—the classic finance sector tug-of-war, now with blockchain-based stakes.

Ultimately, this push reveals a simple, cynical truth: in finance, 'leveling the playing field' often means lobbying to handicap the faster player.

TLDR

• The American Bankers Association’s Community Bankers Council wants Congress to amend the GENIUS Act stablecoin law passed in 2024
• Community banks claim exchanges like Coinbase and Kraken exploit a loophole by offering rewards on stablecoins held on their platforms
• Bankers argue yield-generating stablecoins could drain billions in deposits from community banks, affecting their ability to provide loans
• The Banking Policy Institute previously warned of potential $6.6 trillion in deposit outflows from traditional banking
• Crypto advocacy groups including the Blockchain Association say the concerns are overblown and changes would limit consumer choice

The American Bankers Association’s Community Bankers Council sent a letter to the US Senate this week calling for changes to the GENIUS Act. The group wants to close what they describe as a loophole in the stablecoin law.

Community banks are urging lawmakers to close a loophole in the GENIUS Act that could allow yield-bearing stablecoins.

They warn the gap could drain deposits from local banks and reduce lending to small businesses and households.

Source: The Block

— Wendy O (@CryptoWendyO) January 6, 2026

The GENIUS Act passed in 2024 banned stablecoin issuers from paying interest directly to token holders. Lawmakers agreed with banks that yield-bearing stablecoins could compete with traditional savings accounts.

However, crypto exchanges found a workaround. Platforms like Coinbase and Kraken now offer rewards to users who hold certain stablecoins on their exchanges.

The Community Bankers Council represents more than 200 community bank leaders across the country. They say this practice threatens their banks’ Core business model.

“Some companies have exploited a perceived loophole allowing stablecoin issuers to indirectly fund payments to stablecoin holders through digital asset exchanges and other partners,” the council wrote in their letter.

Banks Warn of Lending Impact

Community banks use customer deposits to fund loans for local businesses and residents. The council argues that if deposits FLOW to yield-bearing stablecoins instead, their ability to lend will suffer.

“If billions are displaced from community bank lending, small businesses, farmers, students, and home buyers in towns like ours will suffer,” the letter stated. The council said exchanges and stablecoin partners cannot fill the gap because they don’t offer federally insured products.

The group wants Congress to ban affiliates and partners of stablecoin issuers from offering interest. They hope the restriction will be included in broader crypto market structure legislation currently moving through Congress.

Banking Industry Escalates Campaign

This letter is part of a larger push by banking groups to revise the GENIUS Act. The Banking Policy Institute led earlier efforts to close the same loophole.

In August, the institute sent a letter to lawmakers warning of massive deposit outflows. The group, headed by JPMorgan CEO Jamie Dimon, estimated that $6.6 trillion could leave the traditional banking system.

ABA President Rob Nichols said in an email to bank CEOs that trillions of dollars could be diverted from banks. He urged lawmakers to understand the risks to local communities.

Crypto Industry Pushes Back

Two major crypto advocacy organizations responded to the banking industry’s concerns. The Crypto Council for Innovation and the Blockchain Association sent their own letter to the Senate Banking Committee in August.

These groups argued that payment stablecoins are not used to fund loans. They said the proposed changes WOULD limit innovation and reduce consumer options.

The Blockchain Association said independent analysis shows no disproportionate deposit outflows linked to stablecoin adoption. The group noted that banks currently hold trillions in reserves at the Federal Reserve rather than deploying them as loans.

The organization warned that preventing platforms from offering rewards would “weaken competition across payments and financial services, undermine regulatory clarity, and reopen a settled law.”

Senators are meeting on Tuesday to discuss comprehensive crypto regulation legislation, according to PunchBowl News. The treatment of yield-bearing stablecoins could be addressed in that bill.