By Mike Dobrich
Congress is working to establish rules for the fast-growing stablecoin market through the GENIUS Act. While the legislation is intended to provide clarity and stability for digital assets, it contains a loophole that could have unintended consequences for the nation’s community banks. By allowing third parties to offer rewards to stablecoin holders, the law risks diverting deposits away from traditional banks—the very deposits that fuel lending to local businesses and families.
Why does that matter?
Deposits fuel community banks. When people deposit money at their local bank, those funds don’t sit idle. They are reinvested in the community—financing mortgages, small business loans, construction projects, and local economic development. Community banks rely heavily on these deposits to support lending, far more than large national banks that can tap wholesale markets for funding.
If stablecoin reward programs lure deposits away from banks, the consequences could ripple across local economies. Federal and industry analyses suggest the shift could be significant. One estimate by the American Bankers Association found that California alone can expect up to $17 billion in deposit outflows.
In a state like California, where small businesses account for the overwhelming majority of employers and innovation drives regional growth, the availability of credit is essential. Community and regional banks help finance startups in Silicon Valley, small manufacturers in the Central Valley, restaurants and retailers in Los Angeles, and family farms throughout the state.
If deposits migrate to unregulated or lightly regulated crypto platforms chasing rewards, those funds are no longer available to support local lending. Crypto exchanges are not designed to replace community banks’ role in underwriting mortgages, supporting small businesses, or providing relationship-based banking services.
The GENIUS Act was designed to strike a balance between innovation and financial stability. Closing the stablecoin rewards loophole would simply ensure that the law works as intended—allowing digital payment innovation while protecting the deposit base that community banks rely on to serve families, businesses, and communities across California and the nation.
If we want thriving local economies, we must ensure that financial innovation strengthens the institutions that help communities grow. It is crucial that our leaders in Congress, especially Senators Alex Padilla and Adam Schiff, urge their colleagues on the Senate Banking Committee to close this loophole.
About the Author: Mike Dobrich is a 30-year veteran in the banking and finance industry.
