On July 18, after more than a decade of legal uncertainty, US lawmakers finally brought part of the crypto industry into the regulatory fold. The newly signed Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act requires issuers of stablecoins—cryptocurrencies that claim a value tied to a more stable asset—to fully back their tokens with cash or short-term Treasury bonds, submit to audits, and follow anti-money laundering rules, among other conditions. In an effort to cement stablecoins as a form of “digital cash” rather than a place to park money, the law also bars stablecoin issuers from paying interest.
But crucially, the law doesn’t ban crypto exchanges from offering customers rewards on their stablecoin holdings, meaning stablecoin holders are still able to receive financial incentives that look a lot like interest. Today, Coinbase customers can earn a 4.1 percent annual reward if they hold a stablecoin called USDC on the platform. The return is similar to what customers might expect from a high-yield savings account.
Banking industry groups say this represents a major regulatory loophole and could push people to take their money out of banks and put it in crypto exchanges, which continue to be far less regulated. Some crypto exchanges offer higher rewards than what’s available from a high-yield savings account (while rates vary, many offer an annual yield of 4.25 percent). Kraken, for example, promotes 5.5 percent “rewards on your USDC holdings.”
Even without rewards, stablecoins pose a potential risk for consumers compared to bank deposits and cash. Unlike checking or savings accounts, cryptocurrencies are not FDIC-insured, meaning that if a stablecoin issuer collapses, the US government won’t directly step in to make consumer deposits whole.
Some regulators and crypto advocates say the GENIUS Act’s stringent reserve requirements and bankruptcy protections obviate the need for FDIC insurance. But stablecoins have collapsed in the past, and research from the Bank for International Settlements (BIS) suggests even the “least volatile” stablecoins, like the ones now the standard under GENIUS, “rarely trade exactly at par” to the value they claim to have. This brings into question “stablecoins’ ability to serve as a reliable means of payment,” BIS researchers write.
Research from the Federal Reserve Bank of Kansas City suggests increased demand for stablecoins could have knock-on effects for the economy. “If stablecoins are purchased out of bank deposit accounts, that necessarily means that there are less funds available for banks to loan,” says Stefan Jacewitz, assistant vice president of the Kansas City Fed. He says incentives like rewards “could induce shifts in funding that are faster and larger than they would have been otherwise.”
In April, the Treasury Department released a report suggesting consumers may move as much as $6.6 trillion out of bank deposits and into stablecoins, partially as a result of the GENIUS Act. If that happens, it could reduce the funds banks have available to lend, and consumers and businesses may face higher borrowing costs in the long run, according to research by the American Bankers Association (ABA), a prominent industry group.