The US banking lobby isn’t keen on interest-bearing stablecoins or their supposed challenge to financial systems — but it may be too late to amend these “loopholes” in the GENIUS Act.
The Banking Policy Institute (BPI), an advocacy group for the banking industry led by JPMorgan CEO Jamie Dimon, wrote a letter to Congress last week, arguing that stablecoins present a risk to existing credit systems.
The BPI urged regulators to close supposed loopholes in the GENIUS Act, a new law regulating the stablecoin industry in the US, lest a shift from bank deposits increase lending costs and reduce loans to businesses.
The bank lobby holds considerable sway in Washington, and while it may be able to complicate lawmaking, some argue that it’s delaying the inevitable: a future denominated in stablecoins.
Banks say stablecoin interest is a threat
Prominent members in the crypto industry have long argued that stablecoin issuers should be allowed to offer users interest. In March, Coinbase CEO Brian Armstrong said interest-bearing stablecoins would give users more control over financial products.
But according to Andrew Rossow, policy and public affairs attorney, the novelty of onchain interest means problems like solvency, liquidity and investor protection aren’t straightforward.
“Claims of ‘easy compliance’ overlook the complex realities of ensuring proper reserve backing, Anti-Money Laundering/Know Your Customer and prudential oversight simultaneously,” he told Cointelegraph.
The BPI’s letter addressed these concerns directly. It particularly called into question a so-called “loophole” in Sec. 4(a)(11) of GENIUS, which prohibits stablecoin issuers from paying “any form of interest or yield (whether in cash, tokens, or other consideration) solely in connection with the holding, use, or retention of such payment stablecoin.”
This section seems to ban yielding stablecoins, but according to Aaron Brogan, founder of crypto-focused law firm Brogan Law, “many believe that it does not ban deals between exchanges and issuers.”
The ability for other firms, like exchanges, to allow interest on stablecoins is based on factors other than “holding use or retention” as mentioned in GENIUS. The word “solely” in the GENIUS Act is a “powerful legal limiter, and it really does mean that if there is any other basis for the deals, they probably don’t qualify,” he told Cointelegraph.
So, while GENIUS is “written to appear quite complete, the prohibition on interest is probably actually relatively porous.”
Related: US Treasury calls for public comment on GENIUS stablecoin bill
Stablecoins, which can often offer much higher interest than traditional bank offerings, “do not substitute for bank deposits, money market funds or investment products, and payment stablecoin issuers are not regulated, supervised or examined in the same way,” said the BPI.
It said that this poses a threat to existing credit models. As things stand, customer deposits allow banks to create a significant portion of the money supply through loans and lines of credit.
“Incentivizing a shift from bank deposits and money market funds to stablecoins would end up increasing lending costs and reducing loans to businesses and consumer households,” the BPI stated.
The banking industry’s concerns may have some grounding, said Rossow. “The bank lobby’s strongest argument is that allowing stablecoin issuers to pay interest risks would create unregulated ‘shadow banks,’ threatening financial stability and consumer safety. Without robust capital, reserve requirements and oversight, stablecoin issuers could trigger liquidity crises and expose users to even more risk,” he said.
However, the banks’ position begins to fall apart when it calls issuer-paid interest on stablecoins “inherently dangerous,” said Rossow. Given that some proposals from the crypto industry show it’s possible to allow issuer interest with proper regulation, “a total ban may seem more about protecting traditional banks than balanced progress.”
Will the GENIUS Act be amended?
Pursuing self-interest at the expense of the greater good is essentially taken for granted in Washington. In this regard, powerful and conflicting influences in the policymaking process can “dilute legislation and regulation, leading to a policy gridlock yielding compromises that would most likely please neither side entirely, only to create further market uncertainty,” said Rossow.
He said that, prior to the 2008 financial crisis, mortgage lenders blocked more strict regulations on predatory lending, directly contributing to the financial risk-taking that led to the financial system’s collapse.
“These lobbying battles only serve to widen the regulatory gaps and weaknesses that undermine our financial stability and consumer protections, further erode public confidence and, now more relevant than ever, our government’s ability to regulate impartially — especially when lobbying appears to grant preferential treatment to vested interests, hidden or not,” Rossow said.
But the banking industry’s ability to actually challenge stablecoins is limited, and it may just be attempting to challenge the inevitable, according to Brogan. It’s unlikely that the crypto industry will accept amendments to GENIUS, a law on which it’s already made concessions.
“The bank lobby is tilting at windmills here. Sometimes you do see new language snuck into other legislation like pork, but I doubt something so significant could pass under the radar. I don’t expect more stablecoin legislation in this Congress,” he said.
Rather, Brogan said that the banks were pushing back against the inevitable, drawing on the historical example of music executives decrying the rise of digital music and file sharing.
“People never wanted to use banks to make payments, they just had to. Now, they don’t. Just like digital music files were better than CDs, disintermediated finance is better and easier than traditional banking,” he said in a recent blog post.
The banking industry has considerable sway in Washington, but its concerns about stablecoins may be a day late and a dollar short. The crypto industry now has the ability to advocate for its own interests successfully and influentially, and it has done so in the form of GENIUS.
What remains to be seen is how this new financial order shakes out for everyday investors. Per the BPI, a shift toward stablecoins means “higher interest rates, fewer loans, and increased costs for Main Street businesses and households.”
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