Genius Act loophole could enable Coinbase drain Trillions from the banks, BPI Warns

The government is soon to realize that regulating crypto will be difficult without stiffening innovation and taking that trade-off will lead to a backlash that will necessitate revisions that take crypto off the short leash.

It's been less than a month since the Genius Act became law and we are already seeing a wave of developments from traditional companies to capitalize on the new financial layer for global payments and value stores.

Both Stripe and Circle are launching EVM L1 blockchains for payments with a focus on stablecoins, highlighting strategic brand positioning to maximize revenue and customize control.

These developments get CT talking with some enthusiastic and others concerned, however, outside the crypto mind space, there's an entirely different view on the growth of stablecoins and companies building atop it.

For those who don't know, yield has been a significant topic when it comes to stablecoins and it has particularly been prohibited that issuers of stablecoins would offer yield.

But this law has loopholes, allowing existing practices that predates the Genius Act to continue being legal despite risks to traditional finance systems.

The Bank Policy Institute (BPI) says platforms like Coinbase and PayPal are taking advantage of a gap in the GENIUS Act, a law signed in July 2025 aimed at keeping stablecoins distinct from insured bank deposits.

Under the law, issuers such as Circle and Paxos can’t pay interest to stablecoin holders.

But here’s the catch: the restriction only applies to issuers. Middlemen – the exchanges and payment apps that distribute stablecoins – can still dangle generous yields to customers. Coinbase, for example, offers up to 4.1% on USDC, while PayPal pays as much as 3.7% on PYUSD.

BPI claims these rewards could spark a major deposit exodus from banks into stablecoins, making it harder for lenders to fund loans and potentially driving borrowing costs higher.

The group cites a U.S. Treasury estimate suggesting the outflow could swell to $6.6 trillion if nothing changes. – Coindoo report

At best, this is comical because yields on stablecoins are always going to exist, whether the government likes it all or not. It might not occur to some people but sometimes the reason why people need clarity of laws generally isn't about abiding by it but to explore means of weaknesses to exploit.

The BPI is right to warn of potential outflows from traditional banks, because with the right marketing, there's great appeal for the adoption of stablecoins.

That said, calling for the restriction of secondary markets seems like a stretch because that would include DeFi protocols and how do you get a piece of code, functioning autonomously to abide by traditional laws, especially when its existence may quite literally depend on the yield incentives offered to users interacting with it?

There's growing fear amongst traditional players that liquidity migration will challenge the stability of conventional financial systems and rightly so, but solutions to this do not exist because said migration is inevitable.

At best, attempts can be made to slow things down, but in the long term, all of which the law could try to restrict will happen anyways and the government won't be able to stop it.