As Congress crafts legislation to establish a regulatory framework for digital asset markets, a number of new studies highlight a key issue in this debate: the risks to small businesses and job creation posed by paying interest, yield, and fees for holding payment stablecoins. The GENIUS Act took a first step in addressing these risks by prohibiting issuers of payment stablecoins from offering yield and interest, but Congress should explicitly extend this important prohibition to cryptocurrency exchanges, affiliates, and other intermediaries.
Community banks play a fundamental role in providing access to credit and banking services to the nation’s communities in both good times and bad times, and fostering small business innovation, job creation, and economic growth. However, allowing cryptocurrency exchanges and other intermediaries to offer incentives such as yield on stablecoin payments poses significant risks to local economies that depend on main street lenders. According to an analysis of industry research by the Independent Community Bankers of America, chair of Digital Assets Subcommittee I, continuing to allow crypto intermediaries to pay interest or yield on stablecoin holdings could reduce community bank lending by $850 billion by reducing industry deposits by $1.3 trillion.
With the Treasury Department estimating that stablecoins will grow from $300 billion to trillions of dollars by the end of this decade, a recent Federal Reserve note research paper highlights warnings about the impact stablecoins will have on bank deposits and loans. The Fed’s paper states that as retail deposits are replaced by stablecoins, banks will face a greater concentration of uninsured wholesale deposits, increasing both liquidity risk and funding costs.
Furthermore, the newspaper said, these pressures could lead to a decline in bank credit, and the impact would be felt particularly by small and medium-sized enterprises that rely on relationship banking. In turn, these pressures may accelerate consolidation in the banking industry, reducing choice for America’s communities and depriving them of a local presence that can understand and respond to Main Street credit needs.
This alarming analysis is critical as lawmakers consider market structure laws and work to avoid harm to local communities and the real economy. Community banks hold $4.8 trillion in deposits, which drive $4 trillion in total lending activity, and this decline in lending will significantly reduce access to credit and economic resilience in communities.
Small business lending led by the community banking sector is a key example. According to the Federal Reserve Bank of Kansas City, in the second quarter of 2024, small business loans accounted for more than twice as much of regional banks’ total loans as regional banks and large banks. Local businesses are most likely to have most or all of their regional bank loan applications approved, according to the Federal Reserve’s Corporate Employer Report. Community banks’ dedication to small businesses supports the U.S. economy, as small businesses account for more than half of America’s job creation and nearly 73 percent of its workforce.
Community banks are important partners for U.S. farmers, accounting for 81% of farmland real estate debt held by commercial banks, 74% of operating debt, and nearly 90% of commercial bank farmland loans with principal amounts of $500,000 or less, according to a Kansas City Federal Reserve Bank report. Rural communities depend on local banks, as they account for more than 71% of all local bank branches and hold nearly two-thirds of local deposits, according to the FDIC.
Digital asset companies are working to establish an alternative financial system where deposit accounts and payments, the foundation of the financial system, are rerouted to operate on stablecoin rails. They offer “rewards,” often advertised as “annual percentage yield,” to encourage users to continue holding stablecoins on their platforms, similar to what consumers would have in a savings account, but without the same regulatory safeguards or deposit insurance as highly regulated community banks. As money is siphoned from local communities as reserves to back high-yielding payment stablecoins, America’s Main Street will pay the price.
To avoid this outcome, Congress needs to ensure that pending digital asset market structure legislation is carefully crafted. The GENIUS Act takes the first step to address the risks posed by yield-bearing payment stablecoins by prohibiting payment stablecoin issuers from offering yield, interest, or other consideration to payment stablecoin holders. Lawmakers must now extend this ban to virtual currency exchanges, affiliates, and other intermediaries to protect communities across America.
The extension of the yield ban will allow community banks to continue to play an important role in boosting local economies across the country, as Americans look to community banks to lend to small businesses, meet agricultural lending needs, and provide banking services to American households across the country.
