The U.S. banking sector is raising concerns that new stablecoin regulations contain "regulatory loopholes" that could potentially trigger trillions of dollars in outflows from the banking system.

On Monday, August 25th, banking lobby organizations including the American Bankers Association, Bank Policy Institute, and Consumer Bankers Association issued warnings to lawmakers regarding perceived regulatory gaps in the new rules. While banks face restrictions on paying interest, crypto platforms can circumvent regulations to indirectly provide interest payments, potentially causing users to transfer funds from banks to crypto platforms and triggering massive capital outflows.

**New Stablecoin Rules Anger Banks**

In July, the U.S. Congress passed the Genius Act aimed at regulating the global stablecoin market valued at $288 billion. Stablecoins are digital tokens pegged to real-world assets like the U.S. dollar. The legislation prohibits issuers from paying "returns" or interest to customers.

Under the new rules, banks will be permitted to issue their own stablecoins but are prohibited from paying any interest. However, crypto exchanges will be able to indirectly provide interest and rewards to users holding third-party issued stablecoins, such as those from Circle Internet Corp. or Tether.

Banks worry this creates an uneven playing field. If customers choose to hold stablecoins on crypto exchanges to earn returns rather than keeping coins or cash dollars at banks, it could trigger massive deposit outflows. According to a Treasury Department report from April, banking representatives claim stablecoins could drain approximately $6.6 trillion in deposits from banks.

Banking representatives warn that such a "deposit migration" would not only weaken banks' lending capacity and impact the overall economy, but could also drive up interest rates and increase financing costs for businesses and households. Ronit Ghose, head of Citi's "Future of Finance" research institute, believes this deposit outflow wave could replicate the money market fund attraction scenario of the 1980s.

Sean Viergutz, a banking and capital markets advisor at PwC, stated that if consumers shift toward higher-yielding stablecoins, banks might be forced to raise deposit rates or rely on more expensive wholesale funding, leading to increased lending costs that make borrowing more expensive for businesses and households.

**Crypto Industry Fights Back: "Banks Fear Competition"**

In response to banking accusations, crypto companies have strongly countered, claiming banks are attempting to prohibit exchanges from paying interest to stablecoin users as "anti-competitive behavior."

The Crypto Council for Innovation and Blockchain Association wrote to senators on Tuesday, accusing banks of trying to create an "unfair payment stablecoin environment" to protect banking interests at the expense of industry development, market competition, and consumer choice.

They also stated that implementing policies according to banks' demands would only tilt competition toward "large traditional banks," which typically don't offer attractive returns to users while depriving consumers of choice.

Coinbase Chief Legal Officer Paul Grewal responded to banking claims on the X platform: "This isn't a loophole at all, and you know it. Most members of Congress have already rejected your unrestrained efforts to avoid competition... The President has also rejected it, it's time to move forward."

However, some high-level U.S. government officials don't dislike cryptocurrencies and even hope they grow to provide new channels for U.S. debt financing. The Trump administration has been pushing to incorporate cryptocurrency into the traditional financial system. Previously, Treasury Secretary Bessent has signaled to Wall Street that he believes stablecoins will become one of the important buyers of U.S. Treasuries in the future.