Potential Vulnerability in GENIUS Act could Disrupt Stablecoin Financial Landscape
News Article: BPI Urges Congress to Close Loophole in GENIUS Act
The GENIUS Act, a groundbreaking federal law regulating stablecoins, was officially signed into law on July 18, 2025. However, concerns have arisen within the U.S. banking industry about a potential loophole that could undermine the traditional banking system.
The Bank Policy Institute (BPI) has called on Congress to address this loophole, arguing that it could lead to nonbank entities issuing stablecoins outside strict regulatory oversight. This, in turn, could reduce banks' role in the stablecoin ecosystem, potentially impairing the traditional banking system's ability to provide credit and maintain liquidity.
The GENIUS Act mandates monthly disclosure of reserve holdings by issuers, but the loophole could allow stablecoin issuers and their affiliates to operate outside clearly defined bank-regulated frameworks. Banks fear that this could result in reduced flow of credit to the economy, increased borrowing costs for businesses and households, and lower availability of traditional loans.
The BPI estimates that the loophole could result in as much as $6.6 trillion in withdrawals from the traditional banking system, potentially causing a significant reduction in credit supply. This, in turn, could lead to higher interest rates, fewer loans, and increased costs for Main Street businesses and households.
The loophole could also allow stablecoin issuers to bypass the law by distributing yields through crypto exchanges or affiliated firms. The GENIUS Act prevents stablecoin issuers from paying interest or yields directly to token holders, but it does not clearly prohibit crypto exchanges or affiliated firms from doing so.
The GENIUS Act, which establishes the first comprehensive federal framework for regulating stablecoins in the United States, aims to limit issuers to permitted institutions and impose strict reserve requirements and anti-money laundering rules. However, some nonbank issuers could still participate under certain conditions, and regulatory details on state-level equivalency are pending.
Analysts project that the stablecoin market could grow to $2 trillion by 2028, making it crucial for regulators to address the loophole to ensure the stability and integrity of the traditional banking system. The BPI's warning highlights the pivotal role that lawmakers and regulators play in shaping the behavior of issuers and exchanges as the industry navigates this new landscape.
The letter supporting the closure of the loophole in the GENIUS Act was co-signed by the American Bankers Association, the Consumer Bankers Association, the Independent Community Bankers of America, and the Financial Services Forum. The implementation of these policies will influence the broader adoption and integration of digital assets within the U.S. financial system.
As the industry faces this pivotal moment, it is clear that the way these policies are implemented will be crucial in maintaining the stability of the traditional banking system and the broader economy.
- The Bank Policy Institute (BPI) urges Congress to tighten regulations to prevent stablecoin issuers and their affiliates from operating outside bank-regulated frameworks, as the loophole in the GENIUS Act could lead to reduced bank credit flow and liquidity in the traditional banking system.
- The GENIUS Act's loophole allows stablecoin issuers to bypass the law by distributing yields through crypto exchanges or affiliated firms, potentially bypassing reserve requirements, strict anti-money laundering rules, and reducing the role of finance and business within the traditional banking system.
