Banking and Finance Law Daily Wrap Up, FINANCIAL TECHNOLOGY—ICBA urges prohibition of stablecoin interest payments by all digital market participants, (Oct 16, 2025)

By George M. Gullo, J.D.

The letter calls on Congress to prohibit all market participants, including exchanges and affiliates, from paying interest, yield, or rewards on payment stablecoins.

In a joint letter to U.S. Senators Tim Scott (R-S.C.) and Elizabeth Warren D-Mass.), the respective chairman and ranking member of the Senate Committee on Banking, Housing, & Urban Affairs, the Independent Community Bankers of America (ICBA) and 44 state affiliates urge the senators to ensure that the proposed Responsible Financial Innovation Act, which creates a regulatory framework for digital assets markets, prohibits all market participants, including exchanges and affiliates, from paying interest, yield, or rewards on payment stablecoins. The letter’s signatories call on Congress to use this opportunity to provide “regulatory clarity without disrupting the vital role of community-bank credit creation in our nation’s local communities.”

Extend prohibition. The Oct. 15, 2025, letter from ICBA supports the Guiding and Establishing National Innovation for U.S. Stablecoins Act’s prohibition on stablecoin issuers paying yield, interest, or other incentives to holders. However, the signatories warn that this restriction can be easily circumvented by entities offering such benefits indirectly by marketing the interest as “rewards” to stablecoin holders and having payments come from affiliates, exchanges, and other third parties instead of directly by the stablecoin issuer. They advocate for Congress to extend the prohibition to all digital asset market participants to prevent this loophole and preserve the payment-focused nature of stablecoins.

Risks to community banks. The letter argues that the ability to earn yield on stablecoins could shift consumer funds away from community bank deposits, particularly during economic stress, as individuals seek higher returns. This poses a significant threat to the $2.35 trillion currently held in community bank deposits. Citing research from the U.S. Treasury Borrowing Advisory Committee and the Kansas City Federal Reserve, the letter highlights that yield-bearing stablecoins could divert up to $6.6 trillion from traditional institutions and reduce bank lending by $325 billion—undermining the financial support community banks provide to small businesses, farmers, and rural populations.

Responsible innovation. While community banks support financial innovation, the letter stresses that it must be balanced and mindful of the risks to established credit channels. The signatories urge the Senate to explicitly prohibit all digital asset market participants from paying interest or yield on stablecoins. They argue that the “stakes are too high” for the borrowers and communities that rely on community banks, and that any disruption to this system would be a radical and harmful shift.

Companies: Independent Community Bankers of America

LegislativeActivity: BankingOperations Blockchain CommunityDevelopment FederalReserveSystem FinancialStability FinTech InterestUsury Privacy PrudentialRegulation SecuritiesDerivatives StateBankingLaws