Redefining banking boundaries

In July 2025, US lawmakers broke new ground by passing the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act—a first-of-its-kind federal legislation that brings rigorous oversight to stablecoins, or digital tokens engineered to maintain a one-to-one peg with the dollar.

- SIDDHARTH PAI

The legislation requires stablecoin issuers to back every issued token with safe, real-asset collateral—cash, short-term US treasuries, or equivalents—and submit to audits, anti-money laundering rules, and transparency.

The law draws a clear line between stablecoins and interest-bearing investments. Issuers are explicitly barred from paying interest, a provision meant to reinforce their role as "digital cash," not de facto savings accounts. But this intent has been undercut by a loophole: Crypto exchanges, which host stablecoin holdings for users, can still offer "rewards" on them—these can functionally mirror interest, enabling customers to earn yield comparable to or exceeding high-yield savings accounts. Coinbase, for instance, offers approximately 4.1% annual rewards for USDC holdings, while Kraken advertises 5.5%. Wired aptly dubbed this outcome "a loophole turning stablecoins into a trillion-dollar fight" (bit.ly/4p6KTEC).

This distinction matters. From a legal standpoint, the GENIUS Act forbids stablecoin issuers from paying interest. Yet exchanges avoid this prohibition by positioning rewards as customer incentives, not issuer liabilities. The effect is the same—users earn yield; banks lose deposits.