The banking industry’s collective anxiety over the GENIUS Act appears to stem less from what the legislation explicitly mandates than from what it conspicuously omits—a regulatory framework that somehow manages to be both broadly thorough and frustratingly vague in equal measure.
While the Act explicitly prohibits payment stablecoin issuers from offering interest or yield directly to holders, it significantly sidesteps the question of whether affiliates or third parties can provide such products. This apparent oversight has banking groups particularly concerned, as it fundamentally creates a regulatory arbitrage opportunity that could undermine the legislation’s core stability objectives.
The irony is palpable: Congress crafted detailed provisions requiring one-to-one reserve backing with US dollars and regulated funds, imposed Bank Secrecy Act compliance obligations, and even mandated 60-day public comment periods on AI-enhanced anti-money laundering detection methods. Yet they somehow failed to address the glaringly obvious workaround of yield products offered through corporate structures one degree removed from the issuer.
Congress meticulously regulated stablecoin reserves and compliance while inexplicably ignoring obvious affiliate yield workarounds that undermine the entire framework.
Banking associations argue this loophole could effectively transform stablecoins into deposit substitutes—precisely what the yield prohibition was designed to prevent. If Bank A cannot offer 4% annual returns on its stablecoin but Affiliate Company B can offer identical yields on the same underlying asset, the regulatory distinction becomes meaningless from a systemic risk perspective.
The three-year phase-out period for unauthorized stablecoins trading in US secondary markets provides ample time for sophisticated financial engineering around these restrictions. Limited exceptions for low transaction volumes offer additional maneuvering room for creative compliance strategies that honor the letter while subverting the spirit of the law.
Perhaps most troubling for traditional banking institutions is how this regulatory gap could advantage non-bank stablecoin issuers over insured depositories. While banks face extensive restrictions on deposit-like products, stablecoin entities might structure yield offerings through subsidiaries or partnerships, creating competitive distortions in what should be a level playing field. The enforcement framework mirrors Section 8 of the Federal Deposit Insurance Act, potentially subjecting violators to severe civil penalties and license revocations.
The 18-month implementation timeline leaves regulators scrambling to address these concerns through rulemaking, assuming they recognize the potential for systemic risk concentration in what amount to unregulated deposit alternatives masquerading as compliant payment instruments. Crypto businesses operating in this regulatory gray area face the risk of accidental violations that could result in severe penalties reaching hundreds of millions of dollars.
