In August 2025, the U.S. Banking Alliance (a group of prominent institutions, including the Bank Policy Institute (BPI)) submitted an urgent letter to Congress. The letter warned of potential "regulatory loopholes" in the GENIUS Act that could allow up to $6.6 trillion in bank deposits to flow into the stablecoin market, representing nearly one-third of U.S. GDP. This warning reveals and highlights the tensions between the traditional financial system and emerging digital assets, as well as the potential impact of stablecoins as new financial instruments on the existing financial order. The banking alliance's concerns are well-founded. Stablecoins like USDT and USDC are widely used on major exchanges like Coinbase and Kraken. These platforms, in turn, use various "yield plans" to attract users, posing an unprecedented threat to the deposit base of traditional banks. GENIUS Act Loophole: The "Gray Area" of Stablecoin Returns On July 18, 2025, Trump signed the "Guiding and Establishing a National Innovation Base for Stablecoins in the United States" (GENIUS Act). This bill establishes a federal regulatory framework for payment stablecoins. It requires issuers to maintain a 1:1 reserve ratio, prohibits algorithmic stablecoins, and clarifies that stablecoins are not securities or commodities. However, the bill has a key loophole. While it explicitly prohibits stablecoin issuers from paying interest or returns directly to holders, it does not extend this prohibition to crypto exchanges or affiliated companies, thus creating a "backdoor" for stablecoins to generate returns through third-party channels. JD Supra analyzed that the GENIUS Act defines "payment stablecoins" as digital assets used for payment or settlement. Their issuers must be subsidiaries of insured depository institutions, federally qualified non-bank entities, or state-qualified issuers, and must publish audited reserve reports monthly. The GENIUS Act is vague on the core issue of "yield provision," leaving loopholes for regulatory arbitrage. The Banking Policy Institute noted that while Circle's USDC doesn't offer yield itself, users holding USDC on partner exchanges like Coinbase can receive annualized rewards of 2-5%. This effectively allows issuers to indirectly provide yield through related parties, completely circumventing the GENIUS Act's restrictions. Market Status: The "Ice and Fire" of Stablecoins The banking industry has issued stern warnings, but the actual size of the stablecoin market remains insignificant compared to the US's $22.118 trillion M2 money supply. This data comparison has led to controversy over the urgency of the threat. Supporters argue that the current risks are fully controllable and that the banking industry is overreacting. Opponents, however, emphasize that the growth potential and network effects of stablecoins could trigger systemic risks similar to the "boiling frog in warm water" model. In practical applications, stablecoins have already assumed a significant role in payments. NOWPayments data indicates that stablecoins accounted for 57.08% of merchant crypto payments in the first half of 2025, with USDT and USDC together accounting for over 95%. Stablecoins, with their low cost and fast processing times, are gradually replacing traditional bank transfers and remittance services in cross-border payments, e-commerce settlements, and emerging market remittances. For example, in Kenya, Africa, stablecoin transaction volume grew by 43% in 2025, primarily used for cross-border trade and payroll payments, demonstrating the unique value of stablecoins in meeting real-world financial needs. $6.6 Trillion in Risk Transfer: The Banking Industry's "Doomsday Scenario." Citing data from an April report by the U.S. Treasury, the Bank Policy Institute (BPI) warned in a letter to Congress that if this loophole is not closed, it could trigger an outflow of $6.6 trillion in bank deposits (equivalent to one-third of all U.S. commercial bank deposits). This would severely weaken banks' ability to create credit and push up lending rates, ultimately impacting the financing costs of ordinary households and businesses. The BPI emphasized that banks rely on deposits to lend, and the high returns of stablecoins could encourage depositors to transfer funds from traditional bank accounts to crypto exchanges. The risk of this "deposit migration" is even more pronounced during economic instability.
This concern about the current stablecoin market is not unfounded. As of August 20, 2025, according to CoinStats data, its total market capitalization is only US$288.7 billion, but its growth rate is astonishing. The US Treasury Department predicts that the stablecoin market size may reach US$2 trillion in 2028. If related parties are allowed to provide income growth, it may accelerate further. The top two stablecoins in the market, Tether and USDC, account for over 80% of the market share. Among them, USDT has a market value of US$167.1 billion and USDC has reached US$68.3 billion. The "income plans" on platforms such as Coinbase and Kraken have become an important means of attracting users. Coinbase gives USDC holders an annualized reward of 3.5%, while the interest rate for bank current accounts is only 0.5%, which is quite attractive to depositors. Regulatory Game: The Balancing Beam of Innovation and Stability Different parties have distinct positions in this financial regulatory battle. The banking union advocates for a complete ban on all forms of stablecoin returns, arguing that this is necessary to protect the stability of the financial system. The crypto industry, on the other hand, advocates for "precise regulation," prohibiting abuses without hindering innovation. On August 19th, the US Treasury Department announced that it was seeking public comment on the implementation of the GENIUS Act, focusing specifically on the use of technologies such as digital identity verification and blockchain monitoring to prevent illicit financial activity. Some experts have proposed compromise solutions, such as requiring stablecoin issuers to bear joint and several liability for the returns of related parties or setting a profit cap to prevent excessive competition. In a February 2025 speech, Federal Reserve Governor Christopher Waller stated that stablecoins are not "the enemy," but regulatory arbitrage is. Many industry insiders agree that what's needed is a regulatory framework that both protects consumers and financial stability and fosters innovation. They believe the GENIUS Act has good intentions, but that loopholes should be addressed through technological solutions and more nuanced rules, rather than simply banning all yield-generating activities. The GENIUS Act will take effect in 2027 or earlier, leaving regulators and market participants with little time to spare. If the banking union's demands are met, related parties will be prohibited from offering stablecoin yields. While the risk of deposit outflows may be temporarily mitigated, the innovative potential of stablecoins may also be stifled, pushing the market toward unregulated offshore platforms. If the status quo persists, stablecoins could erode traditional banking services at a faster pace. However, this could also prompt banks to accelerate their digital transformation and launch more competitive products. The financial choices of ordinary users will be directly impacted by the outcome of this regulatory battle. The answers to these questions will gradually emerge in the coming years: can stablecoins maintain their high returns? Will traditional banks raise deposit rates to compete? Will regulatory arbitrage opportunities be completely closed? Regardless, stablecoins serve as a bridge between traditional finance and the crypto economy, and their development trajectory is irreversible. Finding the right balance between innovation and stability will be a long-term challenge for regulators, practitioners, and users. Conclusion: The "New Frontier" of Finance in the Digital Age. The US Banking Union's call for closing loopholes in the GENIUS Act is essentially a defensive counterattack by the traditional financial system against the digital tide. While the risk of $6.6 trillion in deposit outflows may be exaggerated, it reflects the inevitability of transformation in the financial industry. Stablecoins are not only a new payment tool but also a catalyst for upgrading financial infrastructure. They are forcing traditional banks to rethink their business models and spurring regulators to update outdated regulatory systems. In this "new frontier" of digital finance, there are no clear winners or losers, only those who adapt and those who are left behind. Each of us must understand the nature of this transformation and master emerging financial instruments like stablecoins. This will be a crucial skill for future financial decision-making. Regardless of the final revision of the GENIUS Act, the integration of digital assets and traditional finance is an inevitable trend. Those who can harness this trend will be well-positioned in the future financial landscape.
Jasper
Hui Xin
Jixu
Davin
Aaron