How the "loophole" in the "Genius Act" can transfer billions of dollars from banks to Crypto Assets.

Recently, the GENIUS Act passed by the United States introduced a regulatory framework for the stablecoin market, a move that has sparked enthusiastic reactions in the Crypto Assets community but has raised alarms in traditional banking. The act not only regulates the $288 billion stablecoin market but also has led to fierce debates due to its potential "loopholes," which could result in billions of dollars flowing from traditional banks to cryptocurrency exchanges, thereby reshaping the global financial landscape.

Why do banks feel pressure?

The "GENIUS Act" stipulates that stablecoin issuers are not allowed to pay interest directly, but third-party exchanges are permitted to offer yields for stablecoins like Circle or Tether. This rule means that while banks can issue their own stablecoins, they cannot offer interest on these deposits. This has raised widespread concerns in the banking industry: cryptocurrency exchanges may attract customers by offering higher returns, leading to a loss of deposits for traditional banks.

Industry organizations such as the American Bankers Association, the Bank Policy Institute, and the Consumer Bankers Association have explicitly opposed the bill, calling it a "loophole" in the law. They are concerned that customers may move their funds to crypto platforms in pursuit of higher returns, undermining the banks' funding base. Citi's head of future financial services, Ronit Ghose, warned that the rise of high-yield alternatives like stablecoins could trigger a capital outflow similar to the surge in money market funds from the late 1970s to early 1980s. At that time, the size of money market funds skyrocketed from $4 billion in 1975 to $235 billion in 1982, far exceeding bank deposits, as regulated interest rates reduced banks' competitiveness. According to Federal Reserve data, between 1981 and 1982, bank withdrawals exceeded new deposits by $32 billion.

Sean Viergutz from PwC further pointed out that if the exchange offers attractive returns while banks are limited by interest rate caps, consumers may transfer funds on a large scale. This not only threatens the liquidity of banks but may also have far-reaching effects on the entire financial system.

The optimistic voice of the Crypto Assets community

Despite concerns in the banking industry, cryptocurrency supporters believe that the GENIUS Act brings opportunities for financial innovation. Crypto entrepreneur Lark Davis stated that stablecoins not only do not threaten the financial system, but may actually drive bank innovation, creating a more vibrant financial ecosystem. He emphasized that stablecoins operate on Layer-1 platforms such as Ethereum through smart contracts; for every dollar of stablecoin tokenized, the demand for blockchain networks (like Ethereum) increases. This is also why institutional investors are scrambling to accumulate Ethereum (ETH). Davis believes that stablecoins will provide consumers and institutions with more flexible and competitive financial options, fundamentally changing the landscape of traditional banking services.

Global competition intensifies

The implementation of the "GENIUS Act" not only affects the United States but also stirs waves globally. The Trump administration and Treasury Secretary Scott Bessent have stated that stablecoins could stimulate demand for U.S. bonds and enhance the global influence of the dollar. Meanwhile, industry leaders in the UK are calling for the establishment of a national stablecoin strategy to maintain competitiveness in the digital finance sector. China is also exploring a stablecoin backed by the Renminbi, aiming to elevate the global status of its currency.

Conclusion

The "GENIUS Act" is both a milestone for the stablecoin market and an unprecedented challenge for traditional banking. Its "loopholes" may lead to the flow of funds from banks to crypto asset exchanges, reminiscent of historical capital outflows. However, the crypto community sees it as an opportunity for financial innovation, driving a more competitive and adaptive financial ecosystem. As countries around the world accelerate their stablecoin strategies, competition in the digital payment sector will become increasingly fierce, and the transformative potential of stablecoins is becoming evident globally. In the future, the interplay between traditional banks and emerging digital finance will profoundly influence the evolution of the global financial landscape.