US banks jointly boycott the "Genius Act", and the shockwave of stablecoins shakes traditional giants

A coalition of 52 U.S. banks and organizations, led by the American Bankers Association (ABA), is demanding amendments to the "Genius Act," citing threats to the traditional banking system from the rapidly growing stablecoin market.

Core Conflict: The banking industry's primary objection is to Section 16(d) of the act, which allows state-chartered institutions without federal insurance to operate stablecoin subsidiaries nationwide. Banks argue this creates a "special charter" that enables regulatory arbitrage, bypasses state consumer protections, and undermines the federal-state regulatory balance.
Market Context: The stablecoin market, valued at nearly $267.5 billion and dominated by USDT and USDC, is projected to reach $2 trillion by 2028. This growth is transforming stablecoins from crypto tools into major buyers of U.S. Treasury bonds, with Tether alone holding over $120 billion in them.
Existential Threats to Banks: The banking sector fears massive deposit outflows if stablecoins offer returns, with U.S. Treasury estimates as high as $6.6 trillion. This would force banks to find more expensive funding, reduce their lending capacity, and increase loan rates for consumers and businesses. Additionally, stablecoins threaten to erode bank profits from payment processing services.
Business Model Competition: The clash is fundamentally between two models: banks profit from the spread on loans, while stablecoin issuers earn interest on reserve assets like Treasury bonds. Although the Genius Act prohibits issuers from paying interest, partnerships with exchanges offering incentives could still siphon bank deposits.
Strategic Inconsistency & Future Cooperation: The ABA's stance is nuanced; while opposing certain provisions, it praises the act for allowing banks to issue their own tokenized deposits. This reveals a strategy to control the new crypto economy rather than reject it entirely. The future may involve "co-opetition," where banks become crucial partners for stablecoin issuers by providing custody, reserve holding, and compliance services, blurring the lines between traditional and new finance.

By JAE, PANews

Less than a month after the Genius Act came into effect, an unexpected sniper war began in Washington.

On August 16, 52 banks, lobbying groups and consumer organizations led by the American Bankers Association (ABA) jointly issued a letter to the Senate Banking Committee, publicly calling for amendments to the Genius Act.

The joint letter's core appeal directly addresses specific provisions within the "Genius Act," arguing that they pose a threat to the existing U.S. financial system. Behind the letter lies a multi-faceted struggle between new and established forces over regulatory authority, credit models, and profit sources. Traditional banks are concerned that allowing the "Genius Act" to be fully implemented in its current form could threaten their core position in the financial industry chain.

Background Review: The Rise of the Trillion-Dollar Stablecoin Market

The passage of the Genius Act comes amid exponential growth in the stablecoin market. Over the past three years, the stablecoin market has steadily grown, reaching new highs. As of August 19th, the total stablecoin market value approached $267.5 billion. USDT and USDC account for over 85% of the market share, with market capitalizations exceeding $165 billion and $66 billion, respectively. This highly concentrated market structure makes the influence of the two major stablecoin issuers, Tether and Circle, significant.

Forecasts from Standard Chartered Bank and U.S. Treasury Secretary Benson & Schmidt both show that under the regulatory framework of the Genius Act, the stablecoin market is expected to reach $2 trillion by the end of 2028. Its expected explosive growth suggests that stablecoins are undergoing a role transformation from a "crypto speculation tool" to a "major buyer of U.S. debt."

Because the Genius Act places strict restrictions on stablecoin reserve assets, short-term U.S. Treasury bonds, with their national credit backing, extremely low default risk, and high liquidity, are an ideal choice for stablecoin issuers. Tether has become the seventh-largest holder of U.S. Treasury bonds, with holdings exceeding $120 billion, a figure even higher than that of sovereign states like Germany.

The systemic trend of converting large amounts of US dollar capital into demand for US debt has brought a stable new "financial backer" to the US government. This also means that the impact of the development of stablecoins has far exceeded the scope of the crypto market, and its impact on the US fiscal and global financial landscape is gradually being realized.

The banking industry's cry: a battle to protect interests amid multiple concerns

The cause of the game between the two parties is precisely the panic of the TradFi system about the deep structural impact that stablecoins are having.

In a letter, 52 organizations, led by the American Banking Association (ABA), publicly expressed serious concerns about the Genius Act. While the bill as a whole lays the foundation for banks to issue crypto assets, the banking industry's core demand is the repeal of Section 16(d), a provision considered a ticking time bomb. Section 16(d) of the Genius Act grants state-chartered depository institutions, which are not federally insured, the ability to operate funds transmission and custody activities nationwide by establishing stablecoin subsidiaries, allowing such institutions to circumvent licensing requirements and regulatory regulations in their respective jurisdictions.

The banking industry argues that Section 16(d) provides certain non-bank entities with "special charters," allowing them to operate across state lines like federally regulated banks without the same consumer protection and prudential oversight obligations. This regulatory arbitrage not only threatens to disrupt the balance between state and federal agencies in the US financial system, but also undermines states' power to protect their consumers. Under the traditional framework, depository institutions not covered by federal insurance must obtain approval from and be subject to oversight by the custodial state to operate in other states. Section 16(d) of the Genius Act disrupts this balance, creating a backdoor for institutions seeking to evade strict regulation and increasing the financial risks consumers face in the event of an institution's failure.

The banking industry's deeper concern is that stablecoins could threaten the low-cost deposit base on which they rely. If stablecoin issuers or their affiliated platforms offer incentives or returns to attract users, a massive influx of deposits could flow from the traditional banking system into stablecoins. A US Treasury report estimates that if stablecoins are authorized to offer returns, they could result in a deposit outflow of up to $6.6 trillion, with the impact on small and medium-sized banks being particularly severe.

An article published in the ABA Banking Journal also pointed out that if the stablecoin market reaches $2 trillion, it will lead to an outflow of approximately $1.9 trillion in bank deposits, close to 10% of total U.S. bank deposits. Such a large-scale outflow of deposits will trigger a series of chain reactions:

1) Banks must find new funding sources to fill the deposit gap, such as through high-cost channels like repurchase agreements, interbank lending, or issuing long-term debt. ABA DataBank estimates that if 10% of core deposits were to flow out, banks' average funding costs could rise by 24 basis points.

2) Deposits are the source of bank loans. Deposit outflows will directly weaken banks' ability to provide credit, forcing them to reduce credit supply.

3) Rising capital costs and shrinking bank credit will translate into higher loan interest rates, which in turn will increase borrowing costs for small and medium-sized enterprises and households, and suppress real economic activity.

In addition to the structural threat of deposit outflows, the widespread adoption of stablecoins will also erode banks' profit sources. Moody's analysts believe that as stablecoins penetrate the payment sector, banks' service fee income from cash management, clearing, and wire transfers will be under long-term pressure.

The essence of the game between the two parties is a competition between different business models: banks profit from the maturity mismatch of "accepting low-cost deposits and lending high-interest loans"; stablecoin issuers earn interest income by "absorbing US dollars and purchasing high-yield US Treasury bonds." Although the "Genius Act" prohibits stablecoin issuers from paying interest directly to users, their partner CEXs can still attract funds by offering incentives to circumvent the ban and strengthen the siphoning effect on bank deposits. For example, USDC has partnered with exchanges such as Coinbase and Binance to launch limited-time deposit incentives.

Interestingly, the American Bankers Association (ABA) has maintained inconsistent stances. While opposing some provisions of the Genius Act, the ABA has also publicly praised the bill for opening up a channel for banks to issue tokenized deposits. The ABA's inconsistent stance reflects the banking industry's key strategy: it doesn't oppose crypto assets, but rather seeks to participate in ways that benefit it. This means gaining control of the crypto economy through innovations like tokenized deposits, while simultaneously preventing non-bank entities from receiving equal treatment and securing their core position within the financial industry chain.

The Game between New and Old Powers: Potential Cooperation Models between Banks and Stablecoin Issuers

While competition between the two sides is heating up, the business world isn't simply a zero-sum game. Banking giants like JPMorgan Chase have already begun exploring new business models like tokenized deposits, which combine the credibility of traditional banks with the instant settlement of blockchain technology, blurring the lines between banks and stablecoin issuers.

Banks are not only competitors to stablecoin issuers but can also become important partners. With the implementation of the Genius Act, compliance-focused stablecoin issuers will be required to deposit their reserves with banks and undergo regular audits, creating new sources of deposits and business opportunities for banks. Furthermore, banks can provide custody, settlement, and compliance services, becoming key infrastructure providers for stablecoin issuers.

The old and new forces are not incompatible; rather, they engage in a mutually beneficial "co-opetition" relationship, drawing on each other's strengths to complement each other's weaknesses. However, it is certain that some TradFi institutions that fail to keep up with the new changes will inevitably disappear in the historical wave of tokenization. Rather than being revolutionized by others, it is better to innovate yourself.