Earlier this year, the Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act) was signed into law. 

Stablecoins, a form of cryptocurrency, are backed by traditional assets—the U.S. dollar, for example.  Stablecoins are used to exchange other cryptocurrencies.  The GENIUS Act established a regulatory framework for this newer type of currency, including rules for distinguishing what makes stablecoins different than traditional currency to protect both consumers and the overall stability of the financial system.

One difference is the treatment of interest payments to consumers.  As stated by the Federal Reserve Bank of Richmond, “The GENIUS Act explicitly excludes payment stablecoins from securities or commodities designation and issuers of payment stablecoins cannot pay interest or yield to customers who hold them.”

While consumers earning interest on their money is generally positive, there are sound reasons to treat stablecoins in a different way, most importantly to preserve a key pillar of how credit and economic development works in the real economy.

The law is already being skirted.  As financial expert and former Consumer Financial Protection Bureau Enforcement Economist Andrew Nigrinis points out,  “Wallets and exchanges now routinely offer ‘yield,’ ‘cash-back,’ or ‘rewards’ that mirror the federal funds rate. The difference is semantic, not economic, and it has profound implications for credit creation.”

Nigrinis continues: “That’s because deposits are not the end of the story; they are the raw material that fuels loans to households, small businesses, and farms, and those loans are what power economic growth.” 

HLF recently sent a letter to members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs out of concern for the effect on deposits into, and thus loans from, financial institutions—especially smaller banks. 

From the letter:

Community banks act as a vital lending source for small businesses–especially in rural and underserved communities–financing 60 percent of all small business loans nationally.

These loans are a crucial part of both local and the larger American economies, enabling small businesses to meet existing payrolls, create jobs, and finance growth and innovation.

The overall effect could be monumental, as deposit outflows from banks could reach up to $6.6 trillion, according to a Treasury Department report.  That would severely hamper investment in underserved communities across the county.  HLF calls on Congress to stick to the stated intent of the GENIUS Act and ensure that implementing that legislation prevents what would be a tragic result.