Author: J.A.E, PANews
Less than a month after the Genius Act took effect, an unexpected sniper battle began in Washington.
On August 16, 52 banks, lobby groups, and consumer organizations led by the American Bankers Association (ABA) jointly published a letter to the Senate Banking Committee, publicly calling for amendments to the Genius Act.
The core demand of the joint action directly targets the special provisions in the Genius Act, arguing that they pose a threat to the existing financial system in the U.S. Behind the joint letter is a multi-party game among old and new forces over regulatory power, credit models, and sources of profit. The traditional banking sector is concerned that if the Genius Act is fully implemented in its current form, it may threaten its core position in the financial industry chain.
Background: The rise of the trillion-dollar stablecoin market.
The passage of the Genius Act coincides with the exponential growth of the stablecoin market. Over the past three years, the stablecoin market has steadily grown, constantly setting new highs. As of August 19, the total size of the stablecoin market approached $267.5 billion, with USDT and USDC accounting for over 85% of the market share, possessing market capitalizations of over $165 billion and $66 billion respectively, and the highly concentrated market structure gives Tether and Circle, the two major stablecoin issuers, significant influence.
Predictions from Standard Chartered Bank and U.S. Treasury Secretary Janet Yellen indicate that under the regulatory framework of the Genius Act, the stablecoin market is expected to reach $2 trillion by the end of 2028, with the anticipated explosive growth suggesting that stablecoins are transitioning from 'crypto speculative tools' to 'major buyers of U.S. Treasury bonds.'
Due to strict restrictions on reserve assets for stablecoins under the Genius Act, short-term U.S. Treasury bonds, backed by national credit, with extremely low default risks and high liquidity, have become the ideal choice for stablecoin issuers. Tether has become the seventh-largest holder of U.S. Treasury bonds, holding over $120 billion in Treasury bonds, a figure that even surpasses the holdings of sovereign nations like Germany.
The systemic trend of a large amount of dollar capital being converted into demand for U.S. Treasury bonds brings stability as a new 'financier' for the U.S. government, which also means that the impact of stablecoin development has far exceeded the scope of the crypto market, and its influence on U.S. finance and the global financial landscape is gradually being realized.
The banking industry's outcry: A battle for interests under multiple concerns.
The cause of the two-party game is the panic in the TradFi system over the deep structural shock that stablecoins are forming.
Led by the American Bankers Association (ABA), 52 organizations publicly expressed serious concerns about the Genius Act in a letter. Although the act generally lays the groundwork for banks to issue crypto assets, the core demand of the banking industry is to repeal Section 16(d), which is regarded as a 'time bomb.' Section 16(d) of the Genius Act grants state-chartered deposit-taking institutions not covered by federal insurance the space to establish stablecoin subsidiaries and conduct fund transfers and custody activities nationwide, meaning such institutions can circumvent licensing requirements and regulatory regulations in their operating locations.
The banking industry believes that Section 16(d) provides certain non-bank entities with 'chartered privileges' that allow them to operate across state lines like federally regulated banks without bearing the same consumer protection and prudential regulatory obligations. Such regulatory arbitrage not only undermines the balance between state and federal agencies in the U.S. financial system but also weakens the power of states to protect their consumers. Under the traditional framework, deposit-taking institutions not covered by federal insurance must obtain approval from the host state and comply with its regulations to operate in other states. However, Section 16(d) of the Genius Act disrupts that balance, opening a backdoor for institutions trying to evade strict regulation, increasing the financial risks consumers face in the event of institutional bankruptcy.
The deeper concern of the banking industry is that stablecoins will pose a threat to its foundation of low-cost deposits. If stablecoin issuers or their affiliated platforms attract users through payment rewards or earnings, a massive amount of deposit funds could flow from the traditional banking system to the stablecoin system. A report from the U.S. Treasury estimated that if stablecoins were authorized to offer yields, it could cause up to $6.6 trillion in deposit outflows, and the impact on small and medium-sized banks would be even greater.
An article published in the ABA Banking Journal also pointed out that if the stablecoin market reaches a size of $2 trillion, it would result in an outflow of approximately $1.9 trillion in bank deposits, nearly 10% of total U.S. bank deposits. Such a large-scale outflow of deposits would trigger a series of chain reactions:
1) Banks must seek new sources of funds to fill the deposit gap, such as financing through high-cost avenues like repurchase agreements, interbank lending, or issuing long-term debt. According to estimates from the ABA DataBank, if 10% of core deposits flow out, the average cost of funds for banks may rise by 24 basis points.
2) Deposits are the source of funds for banks to issue loans. A outflow of deposits will directly weaken banks' credit supply capacity, forcing them to reduce credit supply.
3) Rising funding costs and banking credit contraction will translate into higher loan rates, thereby increasing borrowing costs for small and medium-sized enterprises and households, suppressing real economic activity.
In addition to the structural threat of deposit outflows, the large-scale adoption of stablecoins will also erode banks' profit sources. Moody's analysts believe that as stablecoins penetrate the payment sector, banks' fee income from cash management, clearing, and wire transfers will be under long-term pressure.
The essence of the game between the two parties is the competition of different business models: banks profit through 'accepting low-cost deposits and lending high-interest loans' via maturity mismatch; stablecoin issuers profit by 'absorbing dollars and purchasing high-yield U.S. Treasury bonds' to earn interest income. Although the Genius Act prohibits stablecoin issuers from directly paying interest to users, their cooperative CEX can still attract funds by offering rewards to circumvent the ban and strengthen the siphoning effect on bank deposits. For example, USDC has collaborated with exchanges like Coinbase and Binance to launch time-limited deposit reward events.
Interestingly, the position of the American Bankers Association (ABA) has not been consistent; on one hand, it opposes certain provisions of the Genius Act, while on the other, it has publicly praised the act for opening up 'tokenized deposit' issuance channels for banks. The contradictory stance of the ABA reflects a key strategy of the banking industry: it does not oppose crypto assets but hopes to participate in a manner that benefits itself, namely by seizing control of the crypto economy through innovations like 'tokenized deposits' while vigorously blocking non-bank entities from receiving equal treatment, ensuring its core position in the financial industry chain.
The competition between old and new forces: Potential cooperation models between banks and stablecoin issuers.
Although the competition between the two parties is gradually intensifying, the business world is not merely a zero-sum game of 'you die, I live.' Banking giants like JPMorgan Chase have already begun exploring new business models like 'tokenized deposits,' which combine the credibility of traditional banks with the instant settlement capabilities of blockchain technology, blurring the lines between banks and stablecoin issuers.
Banks are not only competitors of stablecoin issuers but can also become important partners. With the implementation of the Genius Act, compliance-focused stablecoin issuers are required to deposit their reserve funds in banks and undergo regular audits, which will bring new sources of deposits and business opportunities to banks. At the same time, banks can also provide custody, settlement, and compliance services, becoming key infrastructure providers for stablecoin issuers.
The new and old forces are not irreconcilable; rather, they represent a competitive and cooperative relationship where strengths complement weaknesses. However, it is certain that some TradFi institutions that cannot keep up with new changes will disappear in the historical tide of tokenization. It is better to innovate oneself than to be revolutionized.
