Banking and Finance Law Daily Wrap Up, FINANCIAL TECHNOLOGY—Report cautions of risks from loophole allowing stablecoin exchanges to pay interest, (Sep 26, 2025)

By Joe Cox, J.D.

The report, from Bank Policy Institute, adds to a chorus of similar statements of concern regarding the loophole.

Bank Policy Institute released a new report which is critical of the loophole currently allowing stablecoin exchanges to pay interest. The report cautions that failure to address that issue could result in a financial crisis. The recent GENIUS Act prohibits stablecoin issuers from paying interest, but allows exchanges to do so, a policy which has been the subject of considerable concern. In fact, last month, BPI issued a release urging Congress to close the loophole. (See Banking and Finance Law Daily, Aug. 12, 2025).

GENIUS Act “loophole”. With an estimated $290 million in dollar-pegged stablecoins outstanding, the stablecoin arena is slated to grow to between $500 million and $2 trillion over the next three years. Against that backdrop, Congress enacted the GENIUS Act, which regulates stablecoins and prohibits issuers from paying interest, but does not prohibit stablecoin exchanges from interest payments.

BPI Report. The BPI report, contemplating the loophole, sees two primary dangers. First, if backed by government securities, increasing stablecoin usage may result in a reduced demand for bank deposits and thus, the supply of bank credit. Second, if invested in uninsured deposits at banks, stablecoins could prompt a run which would cause issuers to withdraw their deposits, potentially creating a financial crisis.

The report concludes that allowing the payment of interest could double the demand for stablecoins, thus exacerbating either potentially negative outcome. “Policymakers, therefore, must continue to monitor stablecoin innovation and adoption closely, ensuring that regulatory frameworks keep pace with a rapidly evolving market to safeguard both deposit stability and broader economic resilience,” notes the report.

Other Voices of Concern. BPI is hardly alone in its expression of concern. Brookings Institution senior fellow Aaron Klein recently cautioned against the loophole, noting that if not remedied, it could “cause massive problems resulting in losses by retail crypto holders, a bailout of big crypto, or a financial crisis.” (See Banking and Finance Law Daily, Sept. 11, 2025).

A conglomerate of groups in August wrote members of the Senate Committees on Banking, Housing and Urban Affairs, as well as of the Digital Assets Subcommittee, with concerns over the stablecoin exchange loophole, particularly due to harm in credit creation and in state governance of these exchanges. (See Banking and Finance Law Daily, Aug. 13, 2025).

Likewise, a month ago, Better Markets released a fact sheet which compared stablecoins to money market funds and ultimately concluded that stablecoins complicate “and may even hinder” the Fed’s monetary policy. (See Banking and Finance Law Daily, Aug. 22, 2025).

Other recent groups have also criticized the provision allowing state-chartered uninsured depository institutions to bypass state licensing and oversight in the stablecoin arena. (See Banking and Finance Law Daily, Aug. 14, 2025).

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