Banking groups warn stablecoins could drain trillions in deposits under GENIUS Act

The GENIUS Act — Guiding and Establishing National Innovation for U.S. Stablecoins — was signed by President Trump on July 18, 2025, establishing the first federal regulatory framework for payment stablecoins. The law requires stablecoin issuers to hold 100% reserves in U.S. dollars, Treasury bills, or similarly liquid assets; publish monthly disclosures of reserve composition; and prioritize stablecoin holders' claims over all other creditors in bankruptcy. The law covers issuers with more than $10 billion in outstanding stablecoins and creates two licensing tracks: a federal OCC charter or state-level licensing with federal oversight backstop. Circle (issuer of USDC) and Tether (issuer of USDT) together control roughly 82% of the $260+ billion stablecoin market as of mid-2025.

The American Bankers Association, Independent Community Bankers of America, and more than 40 banking trade groups sent a joint letter to Congress in May 2025 warning that the GENIUS Act contained a structural flaw that would allow stablecoin issuers to effectively pay interest through affiliate platforms and exchanges — even though the Act explicitly bans stablecoin issuers from paying interest directly to holders. Under the Act's language, a stablecoin issuer like Circle cannot pay you 4% on your USDC balance. But an affiliated exchange or yield platform can offer a rewards program tied to USDC holdings — providing economic yield without technically being 'interest paid by the issuer.' The banking groups called this 'regulatory arbitrage' that would allow crypto companies to gather deposits without bearing the capital requirements, FDIC insurance costs, and lending regulations that traditional banks must carry.

The deposit drain risk is the core banking concern: commercial banks hold approximately $18 trillion in deposits, which they use to fund loans to businesses and homeowners. Those deposits are the cheapest source of bank funding. If consumers and businesses shift even a modest portion of those deposits into yield-bearing stablecoin accounts at affiliated platforms — attracted by higher returns made possible by lower regulatory costs — banks would need to replace that funding with more expensive sources, squeezing their margins and reducing lending. Community banks are most vulnerable: they rely almost exclusively on local deposits and have no access to the capital markets that large banks use as a funding backstop. The ICBA warned that deposit outflows could 'devastate Main Street banks and cut off credit to small businesses and farmers.'

The GENIUS Act's reserve requirement — 100% backed by liquid assets — means stablecoin issuers hold enormous amounts of Treasury bills and short-term government securities. Circle's reserve portfolio as of July 2025 held approximately $30 billion in Treasury bills and reverse repo agreements. As stablecoins grow, this creates structural demand for U.S. government securities: Treasury Secretary SBScott Bessent has called stablecoins 'an important tool for maintaining dollar dominance and ensuring demand for U.S. Treasuries.' This strategic benefit — reducing Treasury borrowing costs by creating new institutional buyers of short-term government debt — is one reason the Trump administration supported the GENIUS Act despite banking industry opposition.

The Silicon Valley Bank episode illustrated the systemic risk concentration that stablecoin reserve requirements create. When SVB failed in March 2023, Circle held $3.3 billion in USDC reserves at SVB — only $26,000 of which was FDIC-insured under the $250,000 per-depositor limit. When Treasury and the FDIC backstopped all SVB depositors through a systemic risk exception, they also protected Circle's $3.3 billion. Banking critics pointed out that this created a precedent: large stablecoin reserves get bailout-equivalent protection without paying FDIC insurance premiums. The GENIUS Act does not resolve this asymmetry — stablecoin issuers are not subject to FDIC assessment fees, creating an ongoing regulatory cost advantage over banks.

OCC Acting Comptroller RHRodney Hood called the GENIUS Act 'transformative' and stated the OCC would 'move expeditiously' to issue stablecoin issuer charters. SEC Chair PAPaul Atkins said it was 'a major milestone' for 'making America the crypto capital of the world.' Fed Chair Jerome Powell said the Fed would 'actively work with Congress and the other banking agencies to develop a robust supervisory and regulatory framework for stablecoin issuers consistent with' the GENIUS Act. These endorsements from all three major financial regulators signal that the framework, despite banking industry concerns, is being implemented as designed. The Fed will retain oversight authority over stablecoin issuers affiliated with federally-regulated banks.

Monthly stablecoin transaction volume exceeded $1 trillion in Q3 2025 — approximately 10 times the volume in 2020. Total stablecoin market capitalization reached $260+ billion. The growth reflects increasing use of stablecoins for cross-border payments, DeFi (decentralized finance) applications, and as a dollar-denominated asset accessible without a traditional bank account. In emerging markets — particularly Latin America, Southeast Asia, and sub-Saharan Africa — USDC and USDT have become de facto dollar accounts for populations with limited access to formal banking. The GENIUS Act's global implications include projections that dollar-backed stablecoins could reach $2 trillion in market cap by 2028 if adoption continues at its current pace.

The GENIUS Act bars foreign entities from issuing regulated stablecoins in the U.S. market — a provision targeting Tether, which is registered in the British Virgin Islands and whose beneficial ownership and reserve management practices have been the subject of regulatory scrutiny since 2021. Tether paid $41 million in CFTC penalties in 2021 for misrepresenting its reserves. The GENIUS Act gives Tether a two-year transition period to obtain U.S. licensing or exit the U.S. market. If Tether exits, USDC — Circle's product, registered in the U.S. — would be positioned to capture the majority of the dollar stablecoin market by default, a dynamic that Circle has actively lobbied for.