Stablecoin Concerns: US Banking Associations Push For Legislative Fixes

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The recent passage of the GENIUS Act, which marks the first stablecoin legislation in the United States, has sparked considerable interest among crypto investors. However, leading banking associations across the country have raised alarms about potential vulnerabilities in the law that could pose risks to the financial system. 

Alleged Risks In New Stablecoin Legislation

In a letter addressed to the Senate Banking Committee, these associations, representing all 50 states, called for urgent amendments to address several identified loopholes.

In their correspondence, the associations emphasized the importance of establishing a clear regulatory framework for the digital asset market. They underscored that the decisions made could significantly influence the structure, efficiency, and fairness of the financial system for years to come. 

Among their key recommendations is a call to strengthen the prohibition on interest payments related to payment stablecoins. While the law prohibits stablecoin issuers from offering yield, the letter points out that this restriction could be “easily circumvented” by exchanges or affiliates providing rewards to stablecoin holders. 

The associations argue that such practices distort market dynamics and may hinder credit creation by diverting deposits into stablecoins chasing higher yields.

To protect the traditional banking system and maintain its role in credit intermediation, the banking groups urged Congress to extend the prohibition on interest payments to include digital asset exchanges, brokers, dealers, and related entities. 

They assert that this recommended adjustment would not only safeguard the financial ecosystem but also allow for the responsible growth of digital payment innovations.

Banking Groups Call For Stronger Financial Oversight

Another concern highlighted in the letter pertains to Section 16(d) of the GENIUS Act, which allows uninsured, out-of-state-chartered financial institutions, such as Special Purpose Depository Institutions (SPDIs), to operate without the approval of host states. 

The banking associations argue that this provision undermines the dual banking system, which they deemed is crucial for ensuring the safety and soundness of financial operations across state lines. 

They called for the repeal of this section to reaffirm state authority in licensing and supervising financial institutions, thereby ensuring consumer protection and a level playing field for all operators.

Additionally, the associations urged lawmakers to close “loopholes” that permit nonfinancial companies to act as payment stablecoin issuers. 

The letter alleges that the separation of banking and commerce has historically protected the US financial system from conflicts of interest and excessive concentration of economic power. 

While the GENIUS Act currently prohibits stablecoin issuance by nonfinancial public companies, it includes pathways for exceptions, the letter further reads. The banking groups contend that allowing any exceptions could lead to regulatory arbitrage and further complicate financial regulation.

Featured image from DALL-E, chart from TradingView.com 

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