Though this has been dubbed by some to be the “Summer of Crypto,” it isn’t all sunshine and roses in the growing industry. In the wake of stablecoin legislation passed in the form of the GENIUS Act, U.S. banks are pushing back.
In major crypto news, U.S. banks have warned that the recently passed act could lead to trillions in deposit outflows because the GENIUS Act allow stablecoins without the need for direct interest payments on behalf of the users. With crypto exchanges still able to offer indirect yields, the belief is that it will undermine traditional deposit systems.
What is the GENIUS Act?
The Guiding and Establishing National Innovation for U.S. Stablecoins Act (or GENIUS Act) was signed into law on July 18, 2025. The Act comprises the first piece of comprehensive federal regulatory framework as it relates to payment stablecoins in the U.S.
In the Act, a mandate was passed that issuers should hold 1:1 reserves in either the U.S. dollar or some other specified low-risk asset while also undergoing monthly disclosures of reserve composition and placing issuers under state or federal oversight.
Key Features of the GENIUS Act
There is a lot of ground to cover within the GENIUS Act. In order to gain a better understanding, it helps to know the key features of the Act. The hope is that this will strengthen the U.S. dollar, promote innovation in the digital asset market, and help to mainstream cryptocurrencies in the eyes of more traditional investors.
Reserve requirements. Each issuer permitted under the Act will be required to maintain reserves backing their stablecoins on a 1:1 basis. Moreover, they will be required to hold that ratio against the U.S. dollar or any other similar liquid asset that has been approved under this legislation.
Regulatory framework. The Act creates the first official federal regulations for the issuance of payment stablecoins. These digital assets were designed to be maintained alongside a fixed value, generally pegged to fiat currencies like the U.S. dollar.
Transparency. Under the Act, issuers are required to disclose their redemption policies publicly. Moreover, they are required to provide reports monthly detailing the total composition of their reserves.
Oversight/enforcement. As part of the framework, there will be state and federal supervision and enforcement provided. Federal regulators will have the power to issue cease-and-desist orders and to take civil money penalties against any issuers that are not compliant.
Designation of issuers. Per the rules of the Act, only permitted issuers – like specifically approved nonbank financial institutions or subsidiaries of insured depository institutions – are able to issue payment stablecoins.
Consumer protection. An important piece of the act, there are a number of provisions incorporated in order to protect consumers, ensure compliance with counter-terrorism financing (CFT) and anti-money laundering (AML), while also destabilising runs on stablecoins.
Circle and Tether Cause Concern
At the heart of their argument, U.S. banks claim that current regulations allow crypto exchanges to offer an unfair yield advantage. Under the recently passed GENIUS Act, issuers – like Tether or Circle – aren’t allowed to directly offer interest, but any affiliated exchanges are allowed to provide those rewards.
Because of this distinction, exchanges may be able to provide more attractive customer funds than a traditional bank. As a result, the banking sector has made claims that there could be a massive flight of deposits from traditional banking into stablecoin platforms.
The belief is that this “loophole” will expose them to unnecessary risk in times where economic stress is abound. They argue that this increased risk could have a negative impact on their ability to support the economy and to lend to customers.
Because of the GENIUS Act, U.S. banks have brought their issue to the attention of lawmakers through leading lobbies. Among them, the Consumer Bankers Association, the Bank Policy Institute, and the American Bankers Association. Each of these organizations demands that revisions be made to the act in order to ensure that stablecoins aren’t able to “outcompete” traditional bank products.
Historical Citation for Deposit Flight Risks
As part of their argument, U.S. banks have made comparisons between stablecoin yields and the 1980s money market fund boom. In those days, money market funds rapidly multiplied because of attractive interest rates. As a result, funds were pulled from checking accounts. According to data from the Federal Reserve, banks would go on to lose more than $30 billion in deposits during that time.
Ronit Ghose, the head of CitiGroup’s Future of Finance, underscored that parallel in a recent report. He issued a warning that stablecoins offering interest could perhaps replicate the shift seen during the 1980s. His analysis only adds weight to calls from banking institutions to implement far stricter interest bans.
Several consulting firms have echoed the sentiment regarding deposit flight risks. Sean Viergutz of PwC noted that banks could also face rising costs in funding. As a result, credit prices for households and businesses would increase.
$6.6 Trillion Outflow?
While the banks have argued that a move to stablecoins could tempt customers to take their money out and search for higher returns, it is hard to gauge the potential severity of the issue facing banks without a number attached.
According to an early 2025 US Treasury report, it is estimated that potential deposit outflows could top $6.6 trillion. The aforementioned groups crafted a letter to lawmakers warning that there could be damage to their lending capacity, an increase in funding costs, and ultimately a push of borrowing costs to customers.
Push Back from Crypto Sector
The banking sector isn’t the only one making noise. Crypto groups have voiced strong opposition to the lobbying being done by U.S. banks. Their argument is that banning exchanges from being able to offer rewards would show clear favouritism to legacy financial institutions.
On top of that, both the Crypto Council and The Blockchain Association claim that making the proposed changes would also stifle the ability of the consumer to choose while also limiting potential growth within the cryptocurrency industry.
Leadership at Coinbase, one of the largest cryptocurrency exchanges in the world, also dismissed this initiative by banking groups. They feel that the campaign is anti-competitive, noting that both the administration and lawmakers have already rejected those claims. Advocates of crypto continue to insist that current regulation shows a balanced, competitive approach.
Policy Crossroads
Since Donald Trump was elected into office for a second term, he has largely been in favour of pro-crypto policies. The White House has also continued to back a closer integration of crypto into more mainstream finance. Further, Treasury secretary Scott Bessent has stated that he feels stablecoins could be a nice bolster for demand as it relates to US government bonds.
As the two sides continue to clash over future customer deposits, lawmakers are tasked with finding some sort of balance. The goal becomes to encourage innovation without destabilising the current system. How effective further lobbying will be remains to be seen.
