The debate over stablecoin rewards has resurfaced in the U.S. Senate, with lawmakers expressing concerns that yield-bearing dollar-pegged tokens could trigger a flight of deposits from traditional banks. During a Thursday hearing of the Senate Banking Committee with top regulators, Senator Angela Alsobrooks (D-Md.) articulated the core worry: "Our concern is offering a bank-like product, like a bank deposit, without any of the protections or regulations that accompany that product and what that could mean for future deposit flight."
The hearing focused on the regulatory grey area created by the GENIUS Act, passed in July. While the law explicitly prohibits stablecoin issuers from paying direct interest to holders, it does not ban third-party platforms—like Coinbase—from offering rewards tied to stablecoin activity. This distinction is now under scrutiny.
Banking trade groups, led by the Independent Community Bankers of America (ICBA), are pressing for tighter restrictions. An ICBA study from last year estimated that allowing platforms to pay yield on stablecoin holdings would reduce community bank lending by $850 billion due to a projected $1.3 trillion drop in industry deposits.
Crypto industry representatives strongly dispute this claim. Coinbase Chief Policy Officer Faryar Shirzad argued in a September blog post that there is "no meaningful link between stablecoin adoption and deposit flight for community banks, and there’s no reason to believe big banks would fare any worse."
Regulators testifying at the hearing, including FDIC Chair Travis Hill and Federal Reserve Vice Chair for Supervision Michelle Bowman, indicated they have not observed large-scale deposit outflows tied to stablecoins. Hill stated, "I don't want to wade into the legislative debate, but banks continue to be performing quite well." Senator Tim Scott (R-S.C.) added that his committee's internal research found deposits increased after the GENIUS Act became law.
The regulatory implementation process is already underway. On the eve of the hearing, the Office of the Comptroller of the Currency (OCC) released a proposal outlining how it would oversee certain stablecoin issuers under the GENIUS framework. Other agencies confirmed they are working on similar rules. Bowman emphasized the Fed's intent to "provide clarity regarding the treatment of digital assets to ensure that the banking system is well placed to support digital asset activities."
The White House is actively involved, hosting meetings between crypto firms and banks and setting an end-of-month deadline to reach a policy resolution. The immediate question for lawmakers is whether to amend the GENIUS Act to address third-party reward programs explicitly or to rely on regulatory interpretation. The outcome will shape whether stablecoins remain primarily a payments tool or evolve into a more direct competitor to insured bank deposits.
