The debate over stablecoin regulation in the United States has taken on a sharper political edge. In a letter sent on January 5, community bank leaders warned the United States Senate that loopholes in current law could allow stablecoins to drain deposits from local banks, undermining lending to small businesses, households, and farmers.
The letter was written by members of the American Bankers Association Community Bankers Council and is explicitly framed as a defence of relationship banking. The authors argue that while innovation in payments is welcome, stablecoins that mimic interest-bearing deposits risk destabilising the funding base of community banks.
Why interest-free stablecoins matter to banks
At the centre of the dispute is the GENIUS Act, which brought the US stablecoin market under a federal regulatory framework. One of its key provisions bans stablecoin issuers from paying interest, yield, or rewards to holders.
According to the bankers, this prohibition was not incidental. It was designed to ensure that stablecoins develop as payment instruments rather than savings products that compete directly with bank deposits. Community banks rely on those deposits to fund local lending, from mortgages to small business loans.
The letter cites an estimate by the US Department of the Treasury that as much as $6.6 trillion in bank deposits could be at risk if interest-bearing stablecoins were permitted. The ABA says it has produced a state-by-state analysis showing how such deposit flight would affect community bank lending capacity.
The alleged loophole
The immediate concern raised by the banks is what they describe as a growing workaround. While stablecoin issuers may not pay interest directly, some are accused of funding rewards indirectly through crypto exchanges or affiliated partners.
From the banks’ perspective, this achieves the same economic outcome as paying interest and undermines the intent of the law. “With this activity, the exception swallows the rule,” the letter argues, warning that large-scale displacement of deposits would hit small towns and local economies first.
The bankers also stress that crypto platforms cannot replace banks’ role in credit creation. Unlike banks, stablecoin issuers and exchanges do not offer FDIC-insured deposits and are not structured to provide long-term lending, a point the letter says is often glossed over in consumer marketing.
A familiar argument for Europe
Although the letter is addressed to US lawmakers, its logic will sound familiar to European readers. In debates over stablecoins, digital wallets, and the digital euro, banks have repeatedly warned that private digital money offering yield could accelerate deposit outflows and weaken traditional credit channels.
The US intervention underscores how politically sensitive this issue has become. Rather than opposing stablecoins outright, community banks are drawing a clear line around remuneration, urging Congress to clarify that the interest ban applies not only to issuers but also to their affiliates and partners.
For European policymakers, the episode offers a glimpse of where stablecoin market structure debates may be heading. As digital forms of money blur the boundary between payments and savings, the question of who holds deposits, and who provides credit, is becoming central to financial policy on both sides of the Atlantic.