The news: A coalition of major US banks is pushing for reforms to the recently enacted GENIUS Act. 

The banks are concerned that a loophole could give non-bank competitors advantages over more regulated traditional banks, per AInvest.

What’s at issue: The primary concern for banks lies in Section 16(d) of the GENIUS Act, which restricts stablecoin issuers from offering interest or yields directly. 

While this provision was intended to protect consumers and prevent stablecoins from becoming unregulated substitutes for bank deposits, the banks argue it's not enough. They claim that non-bank stablecoin issuers can easily bypass this rule by offering yields through affiliates, exchanges, or other partners. Banks can’t do the same because of strict capital and liquidity requirements, and the affiliates they could use would likely fall under banks’ strict regulatory requirements as well.

And according to PayPal’s website, banking groups aren’t wrong—PayPal says customers can earn up to 4% in “rewards” annually on PYUSD balances held on its platform.

Why it matters: If stablecoins can offer a competitive yield, they could become a more attractive alternative to traditional savings accounts. This could trigger a deposit flight. The Bank Policy Institute warned that $6.6 trillion in deposit outflows could be at risk. This could severely impact banks’ ability to make loans to consumers and businesses. 

Ultimately, banks aren’t just concerned about stablecoin competition; they’re worried about the erosion of their fundamental role as intermediaries for credit creation.

Our take: The main challenge for traditional banks is that they have to compete on a new front with different rules. But it’s also a major risk to their customers, who could not only move their money over to competitors’ accounts—but also lose it. 

While a 4% reward rate is highly attractive and far exceeds most traditional savings account interest, these stablecoin holdings are not necessarily protected by FDIC insurance. Without this insurance, a platform failure could mean consumers lose their entire investment—a risk that does not exist with a federally insured bank deposit.