The American Bankers Association (ABA) Community Bankers Council yesterday (6th) sent a joint letter to the Senate, urging that the upcoming "Crypto Market Structure Act" close the loophole that allows stablecoins to indirectly pay interest through exchanges. This struggle over the fate of $6.6 trillion in deposits has rapidly heightened the intensity of financial regulation in Washington.
The Cracks After the GENIUS Act
The GENIUS Act, passed in 2025, was initially seen as a "ceasefire" 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. However, less than six months after the law's implementation, the ABA (American Bar Association) discovered that money was still flowing out. According to a letter the ABA sent to the Senate , exchanges like Coinbase and Kraken were using "Rewards" to distribute the returns from their holdings of government bonds to users. Although the law prohibits the use of the word "interest," it couldn't stop the homogeneous returns. Bankers stated bluntly in the letter:
"These arrangements are causing exceptions to overwhelm the rules, rendering the bans ineffective."
For consumers, the attraction lies in the inflow of money, whether it's advertised as interest or rewards. When stablecoins offer deposit functionality and allow for on-chain transfers at any time, traditional banks lose out due to their dual disadvantages in liquidity and yield.
The existential alarm bells of community banks
The Treasury Department estimates that if de facto interest payments continue to spread, the insured banking system across the United States could lose $6.6 trillion in deposits. For large Wall Street institutions, this might just be a shift on their balance sheets; for community banks spread across states, it means a drain on their lending resources. Bankers warn that shrinking deposits will weaken the supply of spring agricultural loans, small business working capital loans, and even student and mortgage loans.
What displeases the banking industry even more is "regulatory arbitrage." Stablecoin companies are not required to pay FDIC premiums or be bound by capital adequacy ratios, yet they can attract funds that are essentially the same as bank deposits. This results in lower burdens for operators but higher returns, thus tilting the competitive balance in their favor.
Silicon Valley's Counterattack and Geopolitical Cards
In response to the crackdown, the crypto industry has issued a strong rebuttal. The Blockchain Association and the Crypto Innovation Committee argue that banks are only trying to maintain their monopoly on inefficiency and low interest rates; the incentive mechanism allows consumers to preserve their purchasing power in an inflationary environment, which is market innovation, not avoidance.
Coinbase CEO Brian Armstrong even elevated the issue to the level of international strategy:
"If U.S. lawmakers excessively prohibit dollar stablecoins from generating returns, it will weaken the competitiveness of the digital dollar and hand over the lead to China's digital yuan."
In the Trump administration's "America First" atmosphere, the dollar's hegemony is seen as an unshakeable red line. Armstrong's warning puts Congress in a dilemma: increased regulation could stop the outflow of deposits, but it could also cause international capital to shift to other digital currencies.
The final legislative battle: Who can close the backdoor?
The "Crypto Market Structure Act" has entered its final stage, with the Banking Policy Institute (BPI) and the ABA lobbying extensively to extend the ban on interest payments from issuers to all related parties and exchanges, effectively eliminating the rewards model. For community banks, this is their last line of defense for survival.
However, the Republican Party controls both the White House and Congress and has historically been open to financial innovation. Whether the Trump administration will choose to protect the local banking system or support crypto technology to maintain the dollar's dominance on the blockchain has become Washington's most sensitive policy decision this year.
Regardless of the outcome, this $6.6 trillion deposit defense reveals a harsh reality: lured by decentralization and high returns, if laws merely change their names without altering the underlying incentives, funds will flow along the path of least resistance. The power struggle between banks and the crypto industry will reshape the landscape of dollar flows and regulation over the next decade.
