Banks and Crypto Firms Clash Over Stablecoin Interest Payments Amid Regulatory Battle
Washington, D.C. – A fierce dispute is unfolding between traditional banks and cryptocurrency companies over whether crypto platforms can offer interest-like rewards on stablecoins, threatening to reshape the financial landscape as both sides lobby Congress for favorable legislation.[1][2]
Stablecoins, cryptocurrencies designed to maintain a steady value typically pegged to the U.S. dollar, have surged in popularity for payments and as a bridge between traditional finance and digital assets. Unlike volatile cryptocurrencies like Bitcoin, stablecoins such as USDC or Tether aim for price stability, often backed by reserves like U.S. Treasuries.[1][2]
The core of the conflict lies in the GENIUS Act, a recent law establishing a regulatory framework for stablecoin issuance by both banks and licensed nonbanks. This legislation explicitly prohibits stablecoin issuers from paying interest on these digital assets, a deliberate safeguard to prevent them from luring deposits away from banks.[1][2][3]
“We deliberately said they can’t do all the things that banks can do,” explained Timothy Massad, a research fellow at Harvard’s Kennedy School and former chair of the Commodity Futures Trading Commission.[1] Banks argue that allowing crypto firms to offer yields would erode their deposit bases, reducing funds available for local lending on mortgages, car loans, and small business credit.[2][3]
Bankers Mobilize Against ‘Interest Loophole’
Over 3,200 bankers, represented by groups like the American Bankers Association (ABA) and Independent Community Bankers of America, sent a letter to the U.S. Senate on January 14, 2026, urging lawmakers to close what they call a “payment of interest loophole.”[3]
The letter warns that crypto exchanges like Coinbase and Kraken are already circumventing the ban by offering “rewards” on stablecoin holdings, effectively mimicking interest payments. “Crypto businesses offering stablecoin rewards will siphon trillions from local lending, leaving less money available for car loans, agricultural loans, mortgages, and small business borrowing that drive local economies,” the bankers wrote.[3]
Susan Sullivan, senior vice president for congressional relations at the Independent Community Bankers of America, highlighted the stakes: “Bankers are worried that a yield-bearing stablecoin could disintermediate deposits and erode their balance sheets.”[2] Community banks, in particular, fear losing market share. One banking executive warned that without action, smaller institutions could forfeit a “material amount” of deposits and revenue from interchange fees within a decade.[2]
Aaron Klein, a senior fellow at the Brookings Institution, expressed skepticism toward both sides but underscored a critical risk: deposit insurance. “When a bank makes loans that go bad, customers don’t have to worry because the federal government insures their deposits. Stablecoins offer no such assurance,” Klein noted.[1]
Crypto Advocates Push Back
Cryptocurrency proponents counter that stablecoins pose minimal risk, backed by high-quality assets like Treasuries, and that rewards simply reflect yields from those reserves. They argue the GENIUS Act’s restrictions stifle innovation while banks enjoy government-backed advantages.[1][2]
Platforms like Coinbase are at the forefront, with users holding stablecoins on exchanges potentially earning rewards. Negotiations in the Senate on broader digital asset market structure legislation continue, with a markup scheduled for January 15, 2026. Sen. Angela Alsobrooks (D-MD) has floated language allowing rewards on transactional stablecoin use but prohibiting them for idle wallet holdings.[4]
The Bank Policy Institute (BPI) has voiced concerns about unregulated crypto’s impact on bank credit intermediation, aligning with bankers’ fears.[4] Meanwhile, the Federal Deposit Insurance Corporation (FDIC) proposed rules this week to govern banks issuing stablecoins through subsidiaries, implementing GENIUS Act provisions.[4]
Broader Implications for Finance
Beyond interest payments, stablecoins threaten traditional revenue streams. Banks rely on low-cost deposits to fund loans, while stablecoins offer cheaper, faster payments that could undercut interchange fees on cards.[2] Experts like Morgan from Bank Director predict that banks ignoring stablecoins risk obsolescence, urging them to integrate technologies like smart contracts and AI for automated lending.[2]
“If firms start moving their money and doing all their business in stablecoin, that’s a customer the bank is never going to see,” one analyst warned.[2] Innovations such as programmable stablecoins could enable real-time collateral monitoring and dynamic interest rates, potentially revolutionizing banking if banks adapt.[2]
Stablecoin adoption is accelerating globally. Wyoming recently issued the first state-backed stablecoin, a blockchain-based asset fully backed by the state.[4] Crypto firms like World Liberty Financial, affiliated with the Trump family, are seeking national trust bank charters to issue their own stablecoins like USD1.[4]
However, risks persist. Reports of “wrench attacks”—violent robberies targeting crypto holders, including retirees—highlight security vulnerabilities in the space.[4]
Congressional Showdown Looms
As Senate deliberations intensify, the outcome could determine whether stablecoins evolve into deposit competitors or remain payment tools. Banks seek to extend interest bans to exchanges, brokers, and affiliates, while crypto firms push for flexibility.[3][4]
“We are supporters of financial innovation, including digital assets like stablecoin, and banks of all sizes are exploring ways to participate responsibly,” the bankers’ letter conceded, but insisted on protections for communities.[3]
The tussle underscores a larger transformation: digital assets challenging century-old banking models. With trillions potentially at stake, lawmakers face pressure to balance innovation, stability, and consumer protection in an increasingly digitized economy.[1][2][3]
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