According to Cointelegraph, Keith Kelley, a Republican state senator from Alabama's 12th district, has raised concerns about the potential repercussions of the federal stablecoin legislation, known as the GENIUS Act, which was signed into law by U.S. President Donald Trump two months ago. In a recent op-ed, Kelley highlighted a loophole in the act that could severely affect rural economies, particularly in Alabama.
Kelley argues that the GENIUS Act permits cryptocurrency platforms to offer financial incentives, which might lead individuals to withdraw funds from small community banks. He emphasized that these banks rely heavily on local deposits to support their lending activities. A reduction in deposits could significantly hinder their ability to provide loans to individuals, families, and small businesses. Kelley expressed particular concern for rural farming communities, where financial margins are slim and seasonal cash flow is crucial, warning that losing a reliable lending partner could be disastrous.
Although the GENIUS Act was enacted on July 18, its implementation is pending as the U.S. Treasury and Federal Reserve work on finalizing the necessary regulations. This process began in August with a call for public comments aimed at addressing illicit activities. Supporters of the GENIUS Act believe it will foster innovation by providing regulatory clarity for stablecoin issuers. However, critics, including Timothy Massad, a research fellow at Harvard University, have pointed out potential issues, such as the foreign issuer loophole, which could disadvantage U.S.-based stablecoin issuers.
The loophole identified by Kelley stems from a provision in the act that prohibits stablecoin issuers from paying interest or yields solely for holding the stablecoin. However, the bill does not explicitly prevent issuers from using cryptocurrency exchanges or affiliates to offer yields, potentially bypassing the law. Kelley criticized this as regulatory arbitrage, arguing that it allows cryptocurrency companies to operate like banks without adhering to the same regulations, thereby endangering American families and local economies.
In August, the Bank Policy Institute echoed these concerns, suggesting that the GENIUS Act could lead to significant deposit outflows from traditional banks, potentially disrupting credit flow to dependent communities. The timing of Kelley's concerns is notable, given the ongoing legislative process and the two months since the act's signing. Cointelegraph reached out to Senator Kelley for further comments but had not received a response by the time of publication.