ABA Community Bankers Council Letter Urging Senators to Close the Stablecoin Loophole

To the Honorable Members of the United States Senate:

We write to you today both as bank leaders, and as members of the American Bankers Association's Community Bankers Council, representing the interests of institutions like ours across all 50 states and territories.

Community banks are committed to the core services and relationship-based approach that ensure opportunities for all and keep our country's financial fabric strong and resilient. We take deposits, facilitate secure payments, and lend to local businesses. Our communities depend on us, and we depend on them.

Technology is rapidly changing financial services as it has other sectors, and we see customers' preferences changing too. Community banks will innovate and partner to meet that demand, as we always have, and instant payments are an example of our institutions embracing the future.

But new technology can also enable companies to circumvent the regulation and supervision that banks must follow, creating market distortions that leave consumers unprotected and disadvantage those who play by the rules.

The GENIUS Act, while not perfect from a community bank perspective, was a reasonable attempt to bring the stablecoin market into the regulatory light. Among its most important provisions, a ban on interest payments was put in place to ensure this new payments market can develop and mature without becoming a competitor to bank deposits and disintermediating the community-based lending that fuels our economy.

Under the law, stablecoin issuers cannot pay interest because allowing inducements like interest payments, yield, or rewards could incentivize customers to park their savings not in a bank, but in stablecoins. Congress recognized that this could significantly disrupt community lending because banks use those deposits to provide individuals and businesses with the loans they need to get a home or expand a local business. Without this prohibition, Treasury has estimated that $6.6 trillion in bank deposits are at risk. ABA has prepared a state-by-state analysis of the potential impact on community bank lending stemming from this deposit flight; its findings are attached to this letter.

But some companies have exploited a perceived loophole allowing stablecoin issuers to indirectly fund payments to stablecoin holders through digital asset exchanges and other partners. With this activity, the exception swallows the rule. If billions are displaced from community bank lending, small businesses, farmers, students, and home buyers in towns like ours will suffer. Crypto exchanges and the constellation of stablecoin-affiliated companies are not designed to fill the lending gap, nor will they be able to offer FDIC-insured products, a point they omit from their aggressive advertising.

It is time to stand up for community banks and small businesses by making clear in market structure legislation that the prohibition on interest applies to affiliates and partners of stablecoin issuers. Anything less will put economic growth and local communities at risk.

Download the letter to read the full text.