U.S. Community Banks Join Forces to Block Stablecoin Yield Backdoor, Core of $6.6 Trillion in Deposits Legislative Battle
(Background: Are stablecoins considered cash? After the Genius Act, accounting rules for stablecoins may be adjusted)
(Additional context: U.S. banking industry joins forces to oppose the “Genius Act,” making stablecoins a thorn in the side of traditionalists)

Table of Contents

• The Cracks After the “GENIUS Act”
• Community Banks’ Survival Alarm
• Silicon Valley’s Counterattack and Geopolitical Play
• Final Legislative Battle: Who Can Seal the Backdoor

The American Bankers Association (ABA) Community Bankers Council yesterday (6) sent a joint letter to the Senate, demanding that the upcoming “Crypto Market Structure Act” close the loophole allowing stablecoins to indirectly pay interest through exchanges. This power struggle over $6.6 trillion in deposits has quickly raised the temperature of financial regulation in Washington.

The Cracks After the “GENIUS Act”

The “GENIUS Act,” passed in 2025, was originally seen as a “ceasefire agreement” between traditional banks and crypto assets, explicitly prohibiting stablecoin issuers from directly paying interest to holders, aiming to defend the foundation of bank savings accounts. But less than half a year after the regulation took effect, ABA discovered money was still flowing out. According to the letter submitted to the Senate, exchanges like Coinbase and Kraken use “Rewards” to pass on yields from holding government bonds to users. Although the law bans the term “interest,” it cannot stop similar returns. Bankers bluntly state in the letter:

“Such arrangements are causing exceptions to swallow the rules, rendering the ban effectively meaningless.”

For consumers, whether labeled as interest or rewards, as long as the money hits their accounts, it is attractive. When stablecoins have deposit functions and can be transferred on-chain at any time, traditional banks are at a double disadvantage in liquidity and yields.

Community Banks’ Survival Alarm

The Treasury Department estimates that if indirect interest payments continue to spread, the insured banking system across the U.S. could see $6.6 trillion in deposits evaporate. For large Wall Street institutions, this might just be a ledger shift; but for community banks across states, it’s a drain on lending sources. Bankers warn that shrinking deposits will weaken spring agricultural loans, small business working capital, and even student and mortgage lending.

What further frustrates the banking industry is “regulatory arbitrage.” Stablecoin companies do not have to pay FDIC premiums or meet capital adequacy ratios but can attract funds similar to bank deposits. The low burden on operators and high yields tilt the competitive balance.

Silicon Valley’s Counterattack and Geopolitical Play

In response to the crackdown, the crypto industry has loudly pushed back. Blockchain associations and crypto innovation committees argue that banks only want to maintain their inefficient, low-interest monopoly; reward mechanisms help consumers preserve purchasing power in inflationary environments, representing market innovation rather than evasion.

Coinbase CEO Brian Armstrong even raised the issue to an international strategic level:

“If U.S. legislators excessively ban the yield generation of USD stablecoins, it will weaken the digital competitiveness of the dollar and hand over the leading edge to China’s digital renminbi.”

Under the Trump administration’s “America First” atmosphere, dollar hegemony is seen as an inviolable red line. Armstrong’s warning puts Congress in a difficult position: tightening regulations might prevent deposit outflows but could also push international capital toward other digital currencies.

Final Legislative Battle: Who Can Seal the Backdoor

The “Crypto Market Structure Act” has entered the markup stage. The Bank Policy Institute (BPI) and ABA are lobbying extensively to expand the ban on interest payments from issuers to all related parties and exchanges, leaving no room for the Rewards model. For community banks, this is the last line of defense for survival.

However, with Republicans controlling both the White House and Congress, and traditionally maintaining an open attitude toward financial innovation, the question remains whether the Trump administration will choose to protect the local banking system or support crypto technology to maintain the dollar’s dominance on-chain. This will be the most sensitive policy decision in Washington this year.

Regardless of the outcome, this battle to defend $6.6 trillion in deposits reveals a harsh reality: under the allure of decentralization and high yields, if laws only change names without changing incentives, capital will flow along the path of least resistance. The power struggle between banks and the crypto industry will reshape the future decade of dollar flow and regulatory landscape.