By Siddharth Pai
In July 2025, US lawmakers broke new ground by passing the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act—a first-of-its-kind federal legislation that brings rigorous oversight to stablecoins, or digital tokens engineered to maintain a one-to-one peg with the dollar. The legislation requires stablecoin issuers to back every issued token with safe, real-asset collateral—cash, short-term US treasuries, or equivalents—and submit to audits, anti-money laundering rules, and transparency.
The law draws a clear line between stablecoins and interest-bearing investments. Issuers are explicitly barred from paying interest, a provision meant to reinforce their role as “digital cash”, not de facto savings accounts. But this intent has been undercut by a loophole: Crypto exchanges, which host stablecoin holdings for users, can still offer “rewards” on them—these can functionally mirror interest, enabling customers to earn yield comparable to or exceeding high-yield savings accounts. Coinbase, for instance, offers approximately 4.1% annual rewards for USDC holdings, while Kraken advertises 5.5%. Wired aptly dubbed this outcome “a loophole turning stablecoins into a trillion-dollar fight”.
The rewards loophole and its banking impact
This distinction matters. From a legal standpoint, the GENIUS Act forbids stablecoin issuers from paying interest. Yet exchanges avoid this prohibition by positioning rewards as customer incentives, not issuer liabilities. The effect is the same—users earn yield; banks lose deposits.
Traditional commercial banks and their customers now face a novel competitive threat. Banks rely on core deposit bases to fund lending and credit creation. If depositors shift their savings into stablecoins on exchanges offering high yields, banks could see their deposits and lending power eroded. That shift can potentially raise borrowing costs, straining the broader economy—precisely the destabilisation that bank lobbyists warn against. This dynamic makes the GENIUS Act’s rewards loophole far from benign or technical—it could significantly reshape how consumers allocate their money and how banks operate.
Adding to the tension is the fact that stablecoins remain uninsured by the federal government. Deposits in commercial banks receive Federal Deposit Insurance Corporation (FDIC) coverage up to $250,000, safeguarding customers if a bank fails. Stablecoin holdings, in contrast, carry no such protection. In the event of a stablecoin collapse—perhaps triggered by mismanagement, liquidity stress, or de-pegging—there is no government backstop. Unlike depositors in a failed bank, stablecoin holders would likely bear the full brunt of losses. That gap amplifies systemic risk and raises challenging questions about consumer protection in the digital-asset era.
Regulatory contrasts: US vs Europe
Yet, proponents of the GENIUS Act point to safeguards embedded in the law itself. It prioritises stablecoin holders in insolvency proceedings, giving their claims top position over other creditors, and mandates reserve transparency and audits. These measures offer consumer protection that did not exist before, but they still fall short of the insurance and regulatory safety net that banks enjoy.
The core of the issue is trust and expectation. Banks and their regulators know the risks of runs and failures, and deposit insurance, stress tests, capital requirements, and oversight serve as guardrails. Stablecoin exchanges, by contrast, operate under brand new rules, with rewards structured to draw capital—but without the same institutional safety net. That dynamic may tempt depositors to chase yields but also exposes them to elevated risk—a risk the US government explicitly disclaims responsibility for. As Wired underscores, even stablecoins backed by low-volatility assets “rarely trade exactly at par” with the dollar, hinting at fragility even within the tightly regulated GENIUS framework.
From the vantage of a traditional banker, this shift is not merely symbolic. A potentially sizeable reallocation of household deposits from banks to stablecoin platforms could erode banks’ lending ability, prompting higher interest rates or reduced credit availability. That could deepen systemic vulnerabilities, especially in a downturn when deposit flight becomes dangerous. Political pressures are already surfacing: industry groups are lobbying for the CLARITY Act, which would close the rewards loophole.
This clash between stablecoin platforms and banks also elicits fascinating regulatory questions. Are exchanges offering rewards effectively acting as deposit-taking institutions? If so, should they be subject to the same safety and soundness standards as banks—capital requirements, insurance, oversight? Critics warn that without such safeguards, the financial system becomes more fragile.
By contrast, the European Union’s Markets in Crypto-Assets (MiCA) framework is stricter. It prohibits interest or yield from issuers and platforms, closing any loopholes from the start. US policy, at least for now, is more permissive, retaining innovation at the cost of greater complexity and risk.
The stakes are high. A run on a stablecoin could happen quickly, triggering forced reserve-asset sales, peg breaks, sudden liquidity shortages, and ripple effects across crypto and traditional finance. Unlike banks, there is no FDIC, lender of last resort, or government funds to bail out retail users. Stablecoin holders effectively place trust in platform solvency and regulatory accountability—both still in development under the GENIUS Act.
In the cold light of day, the law’s requirement to back stablecoins with tangible assets is an essential foundation. Stablecoins must be linked 1:1 to cash or treasuries, which is a critical advance. But regulations cannot ignore behavioural incentives. Exchanges offering high rewards replicate yield-seeking behaviour that banking regulators have spent decades curbing. Without FDIC insurance, consumer risk may be commoditised—but no less real.
Thus, various Acts moving through legislation in the US and Europe try to balance innovation and oversight while simultaneously redefining the boundaries of banking, stablecoin issuance, and rewards. This forces the reframing of a simple question: What truly makes money safe? Is it the asset backing or the institutional architecture that protects depositor interests—even when markets fail?
The writer is technology consultant and venture capitalist by invitation.
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