How the "loophole" in the Genius Act shifted billions of dollars from banks to cryptocurrencies

The passage of the GENIUS Act in the United States has introduced a regulatory framework for the stablecoin market, sparking heated reactions within the cryptocurrency community but also sounding an alarm for the traditional banking sector. The act not only regulates the $288 billion stablecoin market but has also triggered intense debate due to its potential "loopholes," which could result in tens of billions of dollars flowing from traditional banks to cryptocurrency exchanges, thereby reshaping the global financial landscape.

Why Are Banks Feeling the Pressure?

The GENIUS Act stipulates that stablecoin issuers are not allowed to pay interest directly, but third-party exchanges are permitted to offer yields on stablecoins such as those from Circle or Tether. This rule means that while banks can issue their own stablecoins, they cannot provide interest on these deposits. This has sparked widespread concern in the banking industry: cryptocurrency exchanges may attract customers by offering higher returns, leading to a loss of traditional bank deposits.

Industry organizations such as the American Bankers Association, Bank Policy Institute, and Consumer Bankers Association have explicitly opposed the act, calling it a legal "loophole." They worry that customers may transfer funds to cryptocurrency platforms in pursuit of higher yields, weakening the funding base of banks. Ronit Ghose, head of future finance at Citibank, warned that the rise of high-yield alternatives like stablecoins could trigger an outflow of funds similar to the money market fund boom of the late 1970s to early 1980s. At that time, the size of money market funds surged from $4 billion in 1975 to $235 billion in 1982, far exceeding bank deposits, as regulated interest rates reduced banks' competitiveness. According to Federal Reserve data, between 1981 and 1982 alone, bank withdrawals exceeded new deposits by $32 billion.

Sean Viergutz of PwC further pointed out that if exchanges offer attractive returns while banks are constrained by interest rate caps, consumers may move funds on a large scale. This not only threatens banks' liquidity but could also have far-reaching impacts on the entire financial system.

Optimism from the Crypto Community

Despite the concerns of the banking industry, cryptocurrency supporters believe the GENIUS Act brings opportunities for financial innovation. Crypto entrepreneur Lark Davis stated that stablecoins will not threaten the financial system; rather, they may drive banking innovation and create a more dynamic financial ecosystem. He emphasized that stablecoins operate on Layer-1 platforms like Ethereum via smart contracts, and every dollar tokenized as a stablecoin increases demand for blockchain networks such as Ethereum. This is also why institutional investors are racing to accumulate Ethereum (ETH). Davis believes that stablecoins will provide consumers and institutions with more flexible and competitive financial options, fundamentally changing the landscape of traditional banking services.

Intensifying Global Competition

The implementation of the GENIUS Act not only affects the United States but also creates ripples worldwide. The Trump administration and Treasury Secretary Scott Bessent have stated that stablecoins could stimulate demand for U.S. bonds and enhance the global influence of the dollar. Meanwhile, industry leaders in the UK are calling for a national stablecoin strategy to maintain competitiveness in the digital finance sector. China is also exploring a yuan-backed stablecoin, aiming to elevate its currency's global status.

Conclusion

The GENIUS Act is not only a milestone for the stablecoin market but also presents unprecedented challenges for the traditional banking sector. Its "loopholes" may lead to a flow of funds from banks to cryptocurrency exchanges, echoing historical episodes of capital flight. However, the crypto community sees it as an opportunity for financial innovation, driving a more competitive and adaptive financial ecosystem. As countries around the world accelerate their stablecoin strategies, competition in the digital payments sector will become increasingly fierce, and the transformative potential of stablecoins is becoming evident globally. In the future, the contest between traditional banks and emerging digital finance will profoundly influence the evolution of the global financial landscape.

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