Is the GENIUS Act Smart for Community Banks?
The GENIUS Act, passed in July, is the first comprehensive federal framework for payment stablecoins in the United States. On the surface, it promises clarity and an opportunity for community banks to participate in the digital payments space without being overshadowed by unregulated technology firms. For institutions that pride themselves on serving local customers and small businesses, the Act might appear to open doors to innovation while protecting traditional banking functions.
Beneath that surface, however, the Act could accelerate disintermediation. By shifting funds out of local banks and into national stablecoin ecosystems dominated by large issuers and wallet providers, it creates a playing field where scale, liquidity and brand recognition determine success—all factors stacked against community banks.
The law permits stablecoin issuance only by subsidiaries of insured depository institutions, federally approved nonbanks or state-authorized nonbank issuers. In theory, this gives community banks a seat at the table. But the same law bars issuers from paying interest or yield, ostensibly to prevent deposit flight. That prohibition applies only to issuers, not to wallets or custodians, including major exchanges, which remain free to offer yield on stablecoin balances. The result is a competitive asymmetry: community banks as issuers are confined to earning risk-free returns on Treasuries, while wallets capture customer loyalty by paying yield.
Coupled with strict 1-to-1 reserve and audit requirements, this structure leaves issuing banks with little more than float income, foregoing the lending spread they rely on to support their communities. And even if a community bank launches its own stablecoin, the market may reject it. Customers are unlikely to adopt a local coin with limited circulation when they can hold a widely accepted brand like USDC or PayPal’s stablecoin.
Meanwhile, nonbank issuers remain eligible participants under the Act, with no obligation to meet Community Reinvestment Act standards. Thus, deposits may drain from community banks into nonbank issuers who face no duty to serve the communities from which those deposits originate.
For community banks, the GENIUS Act reads less like an invitation to innovate and more like a cautionary tale. It secures the float for issuers and empowers wallets and large-scale players, but risks hollowing out the very deposit base that community banks depend upon.
Please contact Chris Couch or any member of the Phelps’ Banking and Financial Services team with questions or for advice and guidance.
