In August 2025, the U.S. Banking Alliance (a group of prominent institutions, including the Bank Policy Institute (BPI)) submitted an urgent letter to Congress. The letter warned of potential regulatory loopholes in the GENIUS Act, potentially allowing up to $6.6 trillion in bank deposits to flow into the stablecoin market—nearly one-third of U.S. GDP. This warning reveals and highlights the tensions between the traditional financial system and emerging digital assets, as well as the potential impact of stablecoins as new financial instruments on the existing financial order. The alliance's concerns are well-founded. Stablecoins like USDT and USDC are widely used on major exchanges like Coinbase and Kraken. These platforms, in turn, use various "yield schemes" to attract users, posing an unprecedented threat to the deposit base of traditional banks.
GENIUS Act Loophole: The "Gray Area" of Stablecoin Returns
On July 18, 2025, Trump signed the "Guiding and Establishing a National Innovation Base for Stablecoins in the United States" (GENIUS Act). This bill establishes a federal regulatory framework for payment stablecoins. It requires issuers to maintain a 1:1 reserve ratio, prohibits algorithmic stablecoins, and clarifies that stablecoins are not securities or commodities. However, the bill has a key loophole. While it explicitly prohibits stablecoin issuers from paying interest or returns directly to holders, it does not extend this prohibition to crypto exchage or affiliated companies, thus creating a "backdoor" for stablecoins to generate returns through third-party channels.
JDSupra analyzed that the GENIUS Act defines "payment stablecoins" as digital assets used for payment or settlement. Their issuers must be subsidiaries of insured depository institutions, federally qualified non-bank entities, or state-qualified issuers, and must publish audited reserve reports monthly. The GENIUS Act is vague on the core issue of "yield provision," creating loopholes for regulatory arbitrage. The Banking Policy Institute noted that while Circle's USDC doesn't offer yield itself, users on partner exchanges like Coinbase can earn an annualized 2-5% reward for holding USDC. This effectively means the issuer indirectly provides yield through an affiliated party, completely circumventing the GENIUS Act's restrictions. $6.6 Trillion in Risk Transfer: The Banking Industry's "Doomsday Scenario" In a letter to Congress, the Banking Policy Institute (BPI), citing data from an April report by the US Treasury, warned that if this loophole is not closed, it could trigger an outflow of $6.6 trillion in bank deposits (equivalent to one-third of all deposits held by all US commercial banks). This would severely weaken banks' ability to create credit and drive up lending rates, ultimately impacting the financing costs of ordinary households and businesses. The BPI emphasizes that banks rely on deposits to lend, and the high returns offered by stablecoins may encourage depositors to shift funds from traditional bank accounts to crypto exchage. The risks of this "deposit migration" are even more pronounced during economic instability. This concern regarding the current stablecoin market is well-founded. According to CoinStats data as of August 20, 2025, the total market capitalization is only $288.7 billion, but its growth rate is astonishing. The US Treasury Department estimates that the stablecoin market could reach $2 trillion by 2028. If related parties are allowed to provide returns, this growth could accelerate further. The top two stablecoins, Tether and USDC, account for over 80% of the market share. USDT has a market capitalization of $167.1 billion and USDC $68.3 billion. Platforms like Coinbase and Kraken offer "yield programs" as a key tool to attract users. Coinbase offers USDC holders an annualized 3.5% bonus, while bank checking accounts only offer a 0.5% interest rate, making this a significant attraction for depositors.
Market Status: The "Ice and Fire" of Stablecoins
The banking industry has issued a stern warning, but the actual size of the stablecoin market is still insignificant compared to the US M2 money supply of $22.118 trillion. This statistical comparison has led to controversy over the urgency of the threat. Supporters argue that the current risks are fully controllable and that the banking industry is overreacting. Opponents, however, emphasize that the growth potential and network effects of stablecoins could trigger systemic risks similar to the "boiling frog in warm water" phenomenon.
Stablecoins have already occupied a significant position in the payment field. NOWPayments data shows that stablecoins accounted for 57.08% of merchant crypto payments in the first half of 2025, with USDT and USDC combined accounting for over 95%. In cross-border payments, e-commerce settlements, and emerging market remittances, stablecoins, with their low cost and fast processing times, are gradually replacing traditional bank transfers and remittance services. For example, Kenya, Africa, saw a 43% increase in stablecoin trading volume by 2025, primarily used for cross-border trade and payroll payments, demonstrating the unique value of stablecoins in meeting real-world financial needs. The Regulatory Game: The Balancing Beam of Innovation and Stability Positions are distinct across all parties in this financial regulatory battle. The Banking Union advocates for a complete ban on all forms of stablecoin returns, arguing this is necessary to protect the stability of the financial system. The crypto industry, on the other hand, advocates for "precise regulation," prohibiting abuses without hindering innovation. On August 19th, the US Treasury Department announced that it was seeking public comment on the implementation of the GENIUS Act, focusing specifically on the use of technologies like digital identity verification and blockchain monitoring to prevent illicit financial activity. Some experts have proposed compromise solutions, such as requiring stablecoin issuers to be jointly and severally liable for the returns of related parties or setting a cap on returns to prevent excessive competition. In a February 2025 speech, Federal Reserve Board Governor Christopher Waller stated that stablecoins aren't the "mortal enemy," but regulatory arbitrage is. What's needed is a regulatory framework that protects consumers and financial stability while also fostering innovation. Many industry insiders agree. They believe the GENIUS Act has good intentions, but that loopholes should be addressed through technical solutions and more detailed rules, rather than simply banning all yield-generating activities. The GENIUS Act will take effect in 2027 or earlier, leaving regulators and market participants with limited time. If the banking union's demands are met, related parties will be prohibited from offering stablecoin yields. While the risk of deposit outflows may be temporarily mitigated, the innovative potential of stablecoins may also be stifled, pushing the market toward unregulated offshore platforms. If the status quo persists, stablecoins could erode traditional banking services at a faster pace. However, this could also prompt banks to accelerate their digital transformation and launch more competitive products. The financial choices of ordinary users will be directly impacted by the outcome of this regulatory battle. The answers to these questions will gradually emerge in the coming years: can stablecoins' high returns be sustained? Will traditional banks raise deposit rates to compete? Will regulatory arbitrage opportunities be completely closed? Regardless, stablecoins serve as a bridge between traditional finance and the crypto economy, and their development trajectory is irreversible. Finding the right balance between innovation and stability will be a long-term challenge for regulators, practitioners, and users. Conclusion: The "New Frontier" of Finance in the Digital Age The US Banking Union's call to close loopholes in the GENIUS Act is essentially a defensive counterattack by the traditional financial system in the face of the digital wave. While the risk of $6.6 trillion in deposit outflows may be exaggerated, it reflects the inevitability of transformation in the financial industry. Stablecoins are not only a new payment tool but also a catalyst for upgrading financial infrastructure. They are forcing traditional banks to rethink their business models and spurring regulators to update outdated regulatory systems.
In this "new frontier" of digital finance, there are no absolute winners or losers, only those who adapt and those who are left behind. Each of us must understand the nature of this transformation and master emerging financial instruments like stablecoins. This will be a crucial skill for future financial decision-making. Regardless of the final revision of the GENIUS Act, the integration of digital assets and traditional finance is an inevitable trend. Those who can harness this trend will be well-positioned in the future financial landscape.
