## The Stablecoin Yield Trap: How $6.6 Trillion Could Drain from Traditional Banking

The clash between traditional finance and crypto is intensifying. U.S. banks are sounding alarms over proposed stablecoin regulations under the GENIUS Act, arguing that the rules could trigger an unprecedented indirect drain of deposits through yield-bearing crypto platforms.

**The Core Problem: A Regulatory Loophole**

Here's the issue: The GENIUS Act prohibits stablecoin issuers like Circle and Tether from directly offering interest payments. But there's a catch—affiliated crypto exchanges can legally provide rewards on stablecoins held on their platforms. Banks see this as a backdoor that undermines deposit protection while giving digital platforms an unfair competitive advantage.

U.S. banking organizations, led by the American Bankers Association, the Bank Policy Institute, and the Consumer Bankers Association, are pushing back hard. They argue this regulatory gap could redirect as much as $6.6 trillion in deposits away from traditional banking into stablecoin platforms—a massive shift that would weaken their lending capacity and potentially destabilize the financial system.

**Why Banks Are Panicking: The Money Market Precedent**

This isn't theoretical concern. Banking analysts point to the 1980s money market fund explosion as a cautionary tale. Back then, attractive yields on money market funds triggered a significant deposit flight from checking accounts. Federal Reserve data shows banks lost over $30 billion in net deposits during that era. Citi's Ronit Ghose recently drew the parallel in a major report, warning that stablecoin yields could replicate that exact disruption on a much larger scale.

The risk extends beyond deposits. Consulting firm PwC warns that reduced deposit bases could force banks to raise funding costs, which would ultimately translate into higher credit prices for businesses and consumers struggling with already-elevated borrowing rates.

**Crypto's Counterargument: Competition Over Caution**

Crypto advocates aren't backing down. The Blockchain Association and Crypto Council for Innovation argue that restricting yield rewards would simply protect legacy institutions from competition. They contend the regulation already strikes a reasonable balance and that banning exchanges from offering rewards would stifle consumer choice.

Coinbase leadership dismissed the banks' lobbying campaign as protectionist, claiming regulators and policymakers have already evaluated and rejected these arguments.

**What's Next?**

The tension reveals a fundamental split: banks fear crypto platforms will exploit regulatory gaps to drain deposits through indirect yield mechanisms, while crypto firms argue banks are resisting healthy market competition. With $6.6 trillion potentially at stake, regulators face mounting pressure from both sides to clarify the rules around stablecoin rewards and deposit markets.