GENIUS Act vs Bank Rewards: Stablecoin Risks Explained
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The GENIUS Act reshapes the stablecoin industry by regulating issuers, reserves, and consumer protections. But a rewards loophole creates new financial risks involving banks, crypto exchanges, and investor safety.
Introduction
In July 2025, the U.S. introduced landmark legislation — the GENIUS Act — designed to regulate stablecoins, enforce full reserve backing, and protect consumers. While it brought much-needed structure to the digital finance industry, it also introduced a major loophole.
Crypto exchanges can offer rewards on stablecoin deposits, something traditional banks cannot do. This has sparked a battle between banks and exchanges, raising concerns about financial stability, deposit drains, and systemic risks.
In this guide, we’ll break down the GENIUS Act, explain the bank vs. crypto rewards clash, and highlight the risks consumers should know before investing in high-yield stablecoins.
1. What Is the GENIUS Act — and What Does It Do?
The GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins Act) is the first federal framework governing stablecoins in the U.S., aiming to increase trust, transparency, and stability.
Key Provisions of the GENIUS Act:
- 1:1 Reserve Backing → All stablecoins must be backed by cash or U.S. Treasuries
- Licensed Issuers Only → Only banks and regulated non-banks can issue stablecoins
- AML/KYC Compliance → Issuers must follow anti-money laundering and identity verification rules
- No Interest on Stablecoins → Issuers cannot pay interest directly
- Consumer Protection → Holders have priority claims if issuers face insolvency
The Loophole:
While issuers cannot pay interest, crypto exchanges can offer “rewards” on stablecoin balances. This regulatory gap is fueling the clash between banks and crypto platforms.
2. Why Banks Are Concerned
Traditional banks argue that crypto exchanges’ rewards programs threaten financial stability by attracting depositors away from savings accounts.
2.1 Systemic Deposit Drain
Exchanges often offer higher rewards on stablecoins than banks pay on savings accounts. Analysts predict trillions of dollars could shift from banks to exchanges if the loophole remains open.
2.2 Financial Stability Risks
A massive outflow of deposits could destabilize the banking sector by:
- Reducing available funds for lending
- Driving higher borrowing costs
- Increasing risks of credit shortages
2.3 Push for Regulatory Revisions
To address these concerns, banks are lobbying for the CLARITY Act, which aims to close the rewards loophole and level the playing field between banks and crypto exchanges.
3. Key Risks for Consumers & the Economy
While high-yield stablecoin rewards sound attractive, they come with significant hidden risks:
3.1 Reserve Liquidity Challenges
- Even with 1:1 reserve backing, issuers heavily invest in short-term Treasuries
- A sudden redemption surge could cause liquidity shortages
- In stressed markets, this could trigger a stablecoin run
3.2 Systemic Contagion Risks
Large-scale redemptions could force issuers to dump Treasuries, destabilizing the U.S. government bond market and potentially causing wider financial disruptions.
3.3 AML & Compliance Gaps
- Issuers are tightly regulated, but crypto exchanges have looser oversight
- This raises money laundering and illicit transaction risks
- Enforcement agencies face blind spots in tracking suspicious activity
3.4 No FDIC Insurance
Unlike bank deposits, stablecoins aren’t FDIC-insured. If an exchange collapses:
- Funds may be frozen
- Recovery could take years
- Consumers bear higher risk exposure
3.5 Reward Arbitrage Loophole
Exchanges label payouts as “rewards” instead of “interest” to bypass regulations, which:
- Creates unfair advantages over banks
- Confuses consumers about safety levels
- Increases the likelihood of future crackdowns
4. Benefits & Drawbacks of the GENIUS Act
The GENIUS Act brings regulatory clarity, but its rewards loophole creates new risks.
4.1 Benefits
- Clear Legal Framework → Provides rules for stablecoin issuers
- Boosts Institutional Confidence → Attracts banks and large investors
- Improved Consumer Protection → Priority payouts during issuer insolvency
4.2 Limitations
- Unregulated Rewards → Undermines the Act’s core intent
- Financial Stability Threats → Encourages deposit outflows from banks
- Compliance Gaps → Exchanges avoid stricter AML and KYC rules
5. The Way Forward for Stablecoins
The U.S. government and global regulators are already planning next steps to stabilize the market.
5.1 The CLARITY Act
Expected to pass in 2026, this new bill aims to:
- Close the rewards loophole
- Extend AML/KYC obligations to crypto exchanges
- Create uniform consumer protections across platforms
5.2 Banks Entering the Stablecoin Race
Traditional banks are now testing regulated, FDIC-backed stablecoins to compete with crypto exchanges — offering higher trust and protection for consumers.
5.3 Global Regulatory Alignment
- The EU’s MiCA framework already bans stablecoin interest payouts
- U.S. regulators may align with international standards to prevent regulatory arbitrage
Conclusion
The GENIUS Act represents a historic step toward stabilizing the U.S. stablecoin market. However, the crypto exchange rewards loophole exposes both consumers and banks to significant risks:
- No FDIC protection
- Potential liquidity crises
- Systemic financial instability
- Increased regulatory crackdowns
For consumers, high-yield rewards may seem attractive, but the risks are substantial. Until the CLARITY Act closes these gaps, investors should stay cautious, diversify holdings, and prioritize regulated platforms when dealing with stablecoins.
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