The loophole the banks identified is real

The GENIUS Act tried to neutralize the deposit threat with one provision: it prohibits issuers from paying interest or yield on a payment stablecoin. The logic was that a stablecoin paying nothing has a hard time competing with a deposit that pays something, so the deposit base stays put.

The problem is the word “issuer.” The Bank Policy Institute laid out the gap plainly: the statute bars the issuer from paying yield, but says nothing about the exchanges and affiliates that distribute the coin. An exchange can pay a holder a reward that tracks Treasury yields, market it jointly with the issuer, and stay inside the letter of the law while defeating its purpose. The largest crypto exchanges already run exactly this play, turning a payment stablecoin into a de facto interest-bearing account that sits outside the banking system.

If the indirect-yield channel holds, the premise behind the GENIUS Act’s deposit protection collapses. A consumer choosing between a community-bank checking account and a stablecoin that pays a Treasury-linked reward through an affiliate is making exactly the comparison the law was written to prevent.

Treasury and the Fed have now sized the risk

The reason this is no longer a rhetorical fight is that the official numbers exist. The Treasury Borrowing Advisory Committee, in an April 2025 presentation, identified roughly $6.6 trillion in transactional deposits, the checkable money sitting in demand accounts, as the tier most exposed to migration into stablecoins. The same committee projected the stablecoin market could reach about $2 trillion by 2028, citing external estimates, against a market that was a fraction of that when the deck was written.

The Federal Reserve went further and modeled the credit impact. In a December 2025 staff note, Banks in the Age of Stablecoins, Fed economists estimated that a large stablecoin-driven deposit drain, on the order of $1 trillion with no recycling back into the banking system, could shrink bank lending by $600 billion to $1.26 trillion. Even a moderate $500 billion drain produced an estimated $190 billion to $408 billion contraction in loans. The same note observed that regional and community banks would need to lean on relationship advantages and local knowledge to hold deposits against digital alternatives, which is the central bank’s way of acknowledging that small banks are the most exposed.

These are not advocacy figures from the banking lobby. They are the government’s own estimates, and they put a credible range on what the banks have been describing.

The variable that decides which scenario plays out is where the reserves go, and here the issuers diverge sharply. The Fed note points out that reserve composition varies widely across the market: Circle holds roughly 13% of its backing in bank deposits, Tether holds close to none, and some smaller issuers such as Gemini’s dollar park their reserves almost entirely in banks. That distinction is the whole game. If a stablecoin issuer puts its reserves back into the banking system as deposits, the money that left a community bank can recycle into the system and the net contraction is smaller. If the issuer holds Treasuries instead, the deposit leaves the banking system for good and the lending hit is real. A market dominated by issuers that favor Treasuries over bank deposits is, in aggregate, a slow drain on bank funding rather than a reshuffling of it.

Why community banks are the soft target

The exposure is not evenly distributed. The American Bankers Association cites the $6.6 trillion Treasury figure when it warns about deposit flight, and the reason the warning bites hardest for small banks is structural. Community banks fund a disproportionate share of local lending from exactly the kind of low-cost transactional deposits that a yield-paying stablecoin targets. The Independent Community Bankers of America put the stakes in concrete terms, noting that community banks make 60% of the nation’s small-business loans and 80% of banking-industry agricultural lending, and that migrating those retail deposits into stablecoins would raise borrowing costs and impair credit availability in the communities that depend on it.

A large money-center bank can replace lost deposits with wholesale funding and barely notice. A small bank in a farming county cannot. When the cheapest part of its funding base is the part most exposed to a new competing product, the squeeze shows up first in what it can lend locally.

The administration thinks the banks are wrong

The counterargument deserves a fair hearing, because it comes from the White House itself. In April 2026 the Council of Economic Advisers published a report arguing that the yield prohibition does very little to protect bank lending, estimating that removing it would increase lending by only about $2.1 billion, a rounding error, and mostly at large banks rather than small ones. The implication is that stablecoin yield is not the deposit magnet the banks claim, and that the GENIUS Act’s restriction is solving a problem that does not exist.

The banks’ rebuttal is that the CEA studied the wrong question. The live concern is not whether ending the prohibition would boost lending. It is whether deposits leave in the first place, and the CEA’s framing largely sidesteps that. Both readings cannot be right, and the data that would settle it, actual deposit flows out of small banks into yield-paying stablecoin arrangements, is only now starting to accumulate as the total stablecoin market sits near its all-time high above $300 billion, tracked in real time on public dashboards.

The compliance build-out is becoming its own barrier, and the next regulatory milestone is close. In April 2026 Treasury’s Financial Crimes Enforcement Network and the Office of Foreign Assets Control jointly proposed anti-money-laundering and sanctions rules for permitted payment stablecoin issuers under the GENIUS Act, with the comment period closing on 9 June 2026. The thrust is that a licensed issuer must run a bank-grade compliance program, which raises the fixed cost of issuance and tilts the field toward large, well-capitalized players. That has a second-order effect on the deposit question: the issuers most able to bear that cost are precisely the ones large enough to move deposits at scale if they choose to.

What to watch over the next year

The decisive variable is whether regulators close the affiliate-yield channel. If the indirect-reward model is allowed to stand, the GENIUS Act becomes a deposit-flight law in practice regardless of its drafters’ intent, and the Fed’s contraction scenarios become live possibilities rather than stress tests. If regulators extend the prohibition to exchanges and affiliates, the deposit threat largely deflates, and stablecoins compete on convenience rather than yield. The banks are lobbying to close the gap through follow-on legislation; the crypto exchanges are defending the revenue line that funds their stablecoin partnerships.

The first year of the GENIUS Act settled the legal architecture. The second year will settle the thing the banks actually care about, which is whether the money stays in their accounts or moves to a token paying Treasury yield through a side door. That outcome was never going to be decided by the statute. It will be decided by how the yield rule is enforced.