Stablecoins at a Crossroads: The GENIUS Act’s Reward Loophole Sparks a Regulatory Clash

The GENIUS Act—landmark U.S. legislation aimed at bringing stablecoins under federal oversight—introduced sweeping changes: issuers must fully back tokens with cash or Treasuries, submit to audits, pursue transparncy, and adhere to anti-money laundering protocols. Crucially, it also bans stablecoin issuers from paying interest to holders.

Yet the law doesn’t stop exchanges from offering “rewards”—financial incentives that closely mimic interest. On platforms like Coinbase and Kraken, holders of tokens like USDC can still earn 4–5% APY, creating a loophole banks see as dangerous. They warn this could entice customers away from FDIC-insured deposits and potentially seep $6.6 trillion into the crypto sphere, weakening banks’ capacity to lend and potentially driving up borrowing costs.

Crypto defenders argue this compromise was essential to get any regulation passed and view rewards as a competitive market force. As the CLARITY Act dialogues begin, this tug-of-war continues and may determine whether stablecoins evolve into mainstream financial rails—or remain fringe instruments challenged by legacy systems. Meanwhile, traditional banks are responding swiftly—some launching their own stablecoins or forming alliances with exchanges.

Why this matters: This isn’t just a bill—it’s a battleground over who shapes the future of digital finance. The outcome could redefine savings, stability, and competition across the financial ecosystem.