Community Banks Push Congress to Tighten the GENIUS Act

They argue that stablecoin issuers are skirting its ban on yield by partnering with exchanges like Coinbase and Kraken, potentially draining deposits from local banks and limiting lending. At the same time, the Digital Asset Market Clarity Act is heading to the Senate, where lawmakers are stil divided over how far crypto oversight should go. While supporters say the CLARITY Act would provide long-needed regulatory certainty, critics warn unresolved issues around sanctions compliance and illicit finance could delay its passage.

GENIUS Act Draws Fire

A coalition of US community bankers is urging Congress to amend the GENIUS Act, arguing that a loophole in the stablecoin legislation is allowing yield-generating crypto products to undermine traditional banks and threaten local lending. In a letter sent Monday to the Senate, the Community Bankers Council of the American Bankers Association said lawmakers should tighten the rules governing stablecoins to prevent issuers from indirectly offering yield to tokenholders through third parties like cryptocurrency exchanges.

The GENIUS Act was passed last year, and it explicitly bans stablecoin issuers from paying interest or yield to holders. Lawmakers supported the restriction after banks argued that yield-bearing stablecoins could compete directly with bank savings accounts and siphon deposits from the traditional financial system. 

However, community bankers now claim that some companies have found ways around the intent of the law. According to the council, stablecoin issuers are effectively enabling yield by partnering with digital asset exchanges and other affiliates that offer rewards to users who hold certain stablecoins on their platforms.

The council pointed specifically to exchanges like Coinbase and Kraken, which offer rewards programs tied to stablecoin balances. While these rewards are not technically paid by the issuers themselves, bankers argue that the end result is the same: consumers are incentivized to move funds out of bank deposits and into stablecoins. The group warned that if this trend continues, it could reduce the amount of capital available for community banks to lend to small businesses, farmers, students, and homebuyers, particularly in rural and underserved areas.

“This activity allows the exception to swallow the rule,” the council said, and added that exchanges and affiliated crypto companies are not designed to replace banks’ role in credit creation. Unlike banks, they argued, these entities do not provide regulator-insured products and are not structured to support local lending needs. The bankers are calling on lawmakers to explicitly prohibit affiliates and partners of stablecoin issuers from offering interest or yield, and they want this restriction included in broader crypto market structure legislation currently moving through Congress.

The push is very similar to earlier efforts by larger banking groups. The Banking Policy Institute, led by Jamie Dimon, wrote to lawmakers last year warning that the same loophole could trigger as much as $6.6 trillion in deposit outflows from the banking system. 

On the other hand, crypto industry groups pushed back strongly. The Crypto Council for Innovation and the Blockchain Association have argued that payment stablecoins are not used to fund loans and that further restrictions would stifle innovation and reduce consumer choice.

CLARITY Act Heads to Senate

Meanwhile, the Digital Asset Market Clarity Act, which is aimed at defining how cryptocurrencies are regulated in the United States, is set to move to the Senate for deliberation next week. US Senator Tim Scott confirmed that a vote on crypto market structure is expected, and lawmakers are preparing to formally debate the bill that could reshape the regulatory landscape for digital assets.

Scott said the Senate is ready to go on record after months of behind-the-scenes work, and revealed that lawmakers have circulated multiple drafts of the legislation to committee members in an effort to build consensus. The House of Representatives passed the legislation in July of 2025, and if the Senate approves it without amendments, it would advance directly to US President Donald Trump for final approval.

US Senator Tim Scott

Despite the progress, the bill remains contentious within the crypto industry. Since its introduction in May of 2025, executives, lawyers, and investors have debated whether the CLARITY Act strikes the right balance between innovation and oversight. MetaLeX founder and crypto lawyer Gabriel Shapiro said the United States is likely to end up with a crypto market structure bill, but warned that unresolved concerns around illicit finance could still complicate the process. He suggested, however, that compromises may ultimately be reached.

Others are more skeptical about the bill moving smoothly through the Senate. Galaxy Digital head of research Alex Thorn said it is still unclear whether bipartisan agreement is achievable, and pointed to lingering disputes that were raised during a recent Senate meeting. 

According to Thorn, Democrats are pressing for changes that would require DeFi front-ends to comply with sanctions, enable interfaces to block illegal transactions, and grant the US Treasury’s Office of Foreign Assets Control expanded authority to act against entities tied to illicit activity. Castle Island Ventures founding partner Nic Carter countered that these demands are largely reasonable and do not necessarily undermine the bill’s core objectives.

Some people believe the drawn-out legislative process is already having tangible effects. Asset manager CoinShares attributed roughly $952 million in outflows from crypto investment products in mid-December to delays surrounding the CLARITY Act.

Coinbase Institutional head of strategy John D’Agostino said he understands why the bill is taking time, and described it as foundational legislation that will shape the long-term growth of crypto and digital asset markets in the United States.