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US community banks are pressing Congress to amend the GENIUS Act to restrict yield-generating stablecoins.
The Community Bankers Council sent a letter to the US Senate calling for tighter rules on stablecoin rewards.
Bankers argue a loophole allows issuers to fund yield payments indirectly through crypto exchanges.
Some companies have exploited a perceived loophole allowing stablecoin issuers to indirectly fund payments.
The council said.
The GENIUS Act bars stablecoin issuers from offering interest, citing risks to bank deposits.
Exchanges including Coinbase and Kraken offer rewards to users holding certain stablecoins.
Community banks said such practices could drain deposits and weaken local lending capacity.
If billions are displaced from community bank lending, small businesses, farmers and home buyers will suffer.
The group said.
The council warned crypto firms cannot replace banks in providing insured lending products.
It urged lawmakers to ban affiliates of stablecoin issuers from offering yield.
The Banking Policy Institute has backed similar changes, warning of massive deposit outflows.
Crypto advocacy groups have opposed revisions, arguing stablecoins are not used to fund loans.