Genius has banned stubcoin yields, but banks are still against competition

The Genius Act contains important rules that prohibit Stablecoin issuers from paying interest directly to holders. This provision is likely intended to protect banks from losing deposits, but it unintentionally created a highly profitable regulatory loophole.

This rule opens up business opportunities for crypto exchanges and fintech distributors. They can now capture this yield and turn it into a powerful engine for innovation.

Bypass Stablecoin yield ban

An important feature that sparked an important debate in light of the act of genius is that it prohibits stubcoin issuers from directly paying interest or yields directly to those holding the stubcoin. By doing so, ACT will reinforce Stablecoins as a simple payment method instead of competing investments or valuable storage with bank savings accounts.

This provision was considered a settlement function to maintain the content of bank lobbyists and ensure the passage of the Genius Act. But Stablecoin's distributors have discovered loopholes in legislative fine printing and have since thrived.

The law not only prohibits issuers from yield yields, but does not prohibit third parties like crypto exchanges from doing so. This gap allows for a profitable workaround.

An issuer who earns interest from underlying reserve assets, such as a US Treasury bill, passes that income to the distributor. Distributors use this yield as a direct source of funding to provide users with high profitable rewards.

Coinbase is an important example of this phenomenon. You will receive some of the yield publishers like Circle and Tether. It then offers a higher annual yield of 4.1% to users who hold USDC or USDT on the platform.

This approach creates a competitive advantage over traditional banks by providing more attractive yields and user experiences. The banking sector responded to this challenge by expressing clear opposition.

Banks warn of large deposit outflows

In August, the Banking Policy Institute urged Congress, which is currently discussing the Cryptocurrency Structure Bill, to tighten up the ridiculous regulations.

“Unless there is an explicit prohibition applied to exchanges acting as distribution channels for Stablecoin publishers or business affiliates, the requirements of the Genius Act can be easily avoided and undermined by allowing Stablecoins holders to pay interest indirectly.”

Bank deposits are the hardest hit. In April, a Treasury report estimated that stubcoins could lead to a deposit spill of $6.6 trillion. Deposit mail is probably even bigger as third-party distributors can pay interest on Stablecoins.

As banks rely on deposits, as the main source of funding for issuing loans, these decreases in deposits inevitably limit the banking sector's ability to expand credit.

However, banks have faced similar existential threats in the past.

Lessons from the 2011 Durbin revision

According to a thread on X by Fintech expert Simon Taylor, the outcome of the bank's genius act reflects the impact of the 2011 Durbin revision.

Congress passed the law to reduce the fees merchants had to pay to banks when customers used their debit cards. Before the amendment passed, these fees were unregulated and were expensive. For banks, this represents a significant stable revenue stream that funded free checking accounts and compensation programs.

The exchange fee concluded with a very low rate for a bank with assets of over $10 billion. However, the loophole was in the exception that explicitly excluded banks with assets under $10 billion from the fee cap.

These small “Durbin exemption” banks can charge old, unregulated fees.

Fintech startups quickly realised the opportunity as they were trying to build low-cost or free consumer products. Companies such as the Chime and Cash app could quickly partner with these small banks to issue their own debit cards.

Partner banks receive high interchange revenues and share them with fintech companies. This important revenue stream allowed FinTech to offer a feeless account, as he earned more from the shared swipe fee.

“Traditional banks couldn't compete. They were Durbin controlled and won half of the exchange per transaction. Meanwhile, NeoBanks partnered with Community Bank to build a billion-dollar business in spreads.

A similar pattern is currently emerging in Stablecoins.

Will the bank resist or adapt?

The loophole in the genius law of Stablecoin distributors enables a powerful new business model that provides built-in funding sources for new competitors. As a result, innovations outside of traditional banking systems will accelerate.

In this case, crypto exchange or fintech startups are freed from the costs and complexity of a banking charter. Instead, it focuses on consumer-oriented aspects such as user experience and market growth.

Distributor revenue from yields inherited from Stablecoin publishers can provide more attractive customer rewards and fund product development. The result is an objectively better, cheaper and faster product than the deposits offered by Legacy Bank.

While these banks may succeed in closing this loophole with future market structure bills, history suggests that another gap will inevitably emerge and fuel the next wave of innovation.

Instead of fighting this new structure with regulatory resistance, the smarter long-term strategy of established banks is to adapt and integrate this new infrastructure layer into operations.

The genius act banned stubcoin yields, but banks are still losing to the competition.