In July 2025, the President signed the GENIUS Act into law, delivering the long-sought legal clarity for the stablecoin market. Under GENIUS, issuers can now acquire federal or state licenses to operate as primary issuers of dollar stablecoins, based on their size. To qualify, they must:
- Maintain full reserves against issued tokens in cash or 90-day treasuries
- Refrain from offering their users monetary incentives, known as yield, on US soil.
- Comply with stability and safety requirements such as:
- Third-party audits and monthly disclosures of reserves
- Anti-money laundering and Know Your Customer compliance (AML/KYC)
Those requirements have immediately disqualified USDT from registering in the US as it includes gold and Bitcoin in its reserves. The parent company Tether now seeks to register a new coin called USAT in the US to cope with the (misguided) onshore-offshore market separation.
Still, the GENIUS Act’s requirements enable stablecoins to become a new payments charter modeled on a narrow banking regime. For now, the government’s real play with the GENIUS Act — allowing the rest of the world to bypass their local central bank currency monopoly by accessing dollars — appears to be underway. The US government gets to issue more treasuries and stablecoin operators issue more tokens against those treasuries and rake in the yield, win-win, right?
But not everyone’s happy. The banking sector is sounding alarms about a “loophole” baked into the GENIUS Act.
In banning issuers from paying interest to stablecoin users, legislators aimed to keep payment stablecoins as digital cash for payments, but to discourage their use as savings instruments. This carve-out for banks is supposed to protect them from disintermediation if people convert their bank deposits to yield-bearing stablecoins. The rationale for this carve-out is premised on the notion that bank deposits fuel credit creation and therefore liquidity, because that’s how new money is created in a fiat system. Lawmakers like Sen. Hagerty (R-TN) pitched it as “responsible innovation” so that future gaps in liquidity don’t send the entire house of cards tumbling down. Unfortunately, that premise is faulty. But first, here’s what this supposed “loophole” allows.
Section 2 (22) of the GENIUS Act defines a payment stablecoin is and, crucially, what it is not. Stablecoins are not a: (i) a national currency; or (ii) a deposit under the Federal Deposit Insurance Act (12 U.S.C. 1813), including those recorded on distributed ledger technology (DLT) (emphasis mine).
If a depository institution like a bank issues digital representations of deposits on a blockchain, these qualify as “deposits” under the Federal Deposit Insurance Act (FDIA) definition, but they wouldn’t count as a payment stablecoin.
Why does this definition matter?
Before GENIUS, no federal law explicitly mentioned DLT-tokenized deposits by banks. Institutions leaned on existing powers and guidance, like FDIC nods for “emerging technologies” if risks are managed soundly. Insured banks could issue DLT-recorded deposits, treated identically to traditional ones for efficiency, like faster settlements. Regulators still viewed them as standard liabilities on the regular balance sheet, following liquidity and capital requirements for banking. For example, JPMorgan’s Onyx/JPM Coin has been running since 2020 on a permissioned blockchain for wholesale payments.
Enter the untamed spirit of the West. As it happens, in 2019, the state of Wyoming created a special category of banks called Special Purpose Depository Institutions or SPDIs. These SPDIs are fully reserved banks (maximally narrow) that can receive deposits and custody assets on behalf of their clients. This means that Wyoming treats tokenized deposits in approved SPDIs as traditional bank deposits, which can legally pay interest under existing banking laws, unlike primary payment stablecoin issuers, which are explicitly prohibited from offering yield to holders under the GENIUS Act’s Section 4 (11).
Addressing critics of the “loophole”
Is this a carve-out for the great state of Wyoming? Not quite. Any state is free to create its own narrow banking regime; in fact, Nebraska followed suit, and Texas is studying similar rules. The exclusion of DLT-recorded deposits allows for real experimentation and competition in payment technologies at the state level (not monetary, though, because these payment tokens are all based on the fiat dollar for value).
One critique is that this exemption creates opportunities for regulatory arbitrage where states with more permissive rules attract digital-asset businesses and investment, think Delaware for crypto. It is a fair critique. But Wyoming (the clearest example) has moved in the opposite direction: its SPDIs face stricter requirements than the federal baseline. Wyoming mandates 100%+ liquid-asset reserves, and its Frontier Stable Token is 102% collateralized. The state’s own examinations report institutions like Kraken operating at reserve levels far above their liabilities. States may compete for business, but capital, liquidity, and consumer-protection rules still apply, and primary issuers remain capped under US$10 billion before needing federal approval. In other words, a state charter for a primary stablecoin issuer won’t draw massive pools of out-of-state capital (those will likely accrue to larger operators elsewhere), but it will draw just enough to remain a competitive regional player. As for other secondary market intermediaries, like Kraken, they will no doubt continue seeking a favorable regulatory environment. That is why a new bill will soon mandate CFTC registration and standards for digital asset market intermediaries (brokers, dealers, custodians, etc.).
Another critique from the Bank Policy Institute (a major banking lobby) warns: “Banks power the economy by turning deposits into loans. Incentivizing a shift from bank deposits and money market funds to stablecoins would end up increasing lending costs and reducing loans to businesses and consumer households (…). It will undermine credit creation throughout the economy. The corresponding reduction in credit supply means higher interest rates, fewer loans, and increased costs for Main Street businesses and households.” But this claim does not hold up to scrutiny.
The causal link BPI draws between deposit outflows to stablecoins and rising lending costs is in fact, inverted. Credit isn’t organically “created” from depositor inflows that banks then lend out; it’s imposed top-down by the Fed’s interventions. Deposits are a mere byproduct.
The credit system turns on three steps. First, the Fed injects reserves into the banking system through open-market operations by purchasing treasury assets to maintain targeted liquidity conditions. Second, banks use those reserves as the base for loan issuance. Third, each loan creates new money as deposits, which effectively stretches the “real” base money to be used as capital for production in the economy. That is the basis of fractional reserve banking. In this structure, deposits are not a prerequisite for lending, they are the outcome. Because the Fed can supply reserves elastically, deposit outflows into stablecoins do not, on their own, constrain bank credit.
The BPI narrative reverses causality and overstates the fragility of credit supply in the face of stablecoin growth. Credit demand will endure despite yield on stablecoins; businesses, households need funds, but maybe in the future new actors can step in to provide private credit. Besides, how has a fractional reserve banking system under central bank fiat money served us so far anyway?
Setting aside the affordability crisis, consider how AI market is valued today. Big Tech uses relatively cheap debt to build nuclear-powered data centers to then run LLMs for business models that fail to meet viability thresholds, yet the market is highly leveraged and circular. In contrast, a moderation in credit growth, prompted by market preferences shifting toward more stable and efficient alternatives like a private market for money (perhaps via Bitcoin and stablecoins), could actually promote healthier, more balanced credit growth. It encourages investments grounded in real savings rather than inflated credit, reducing the severity of future cycles and allowing resources to flow to truly productive uses without the overhang of inevitable busts.
