Lawmakers are being urged to prohibit interest and reward payments on payment stablecoins amid concerns over damage to local lending and small business credit.
The warning comes as Congress debates digital asset market structure legislation and broader regulation of stablecoins.
Research cited by community banking groups suggests yield-bearing payment stablecoins could drain deposits from traditional banks.
Payment stablecoins are increasingly marketed with rewards resembling savings account yields but without bank-style safeguards.
Community banks argue this shift threatens their ability to fund small businesses, farms and local economies.
The Independent Community Bankers of America said continued interest payments on payment stablecoins could sharply reduce bank deposits.
Analysis reviewed by the group estimates a potential $1.3 trillion fall in deposits across the banking sector.
That deposit decline could translate into an $850 billion reduction in community bank lending.
Community banks play a central role in relationship-based lending for small businesses and rural communities.
Federal Reserve research has also flagged risks from stablecoins substituting for traditional retail deposits.
The Fed warned banks could face higher liquidity risk as deposits shift into stablecoin products.
Increased reliance on uninsured wholesale funding could raise bank funding costs, the paper noted.
The research suggested these pressures may reduce overall bank credit availability.
Small businesses are expected to feel the impact most due to their reliance on local lenders.
Banking industry consolidation could accelerate as smaller banks struggle to retain deposits.
Fewer community banks would reduce financial access in rural and underserved areas.
Community banks currently hold around $4.8 trillion in deposits supporting roughly $4 trillion in lending.
Any large-scale reduction in lending could weaken economic resilience in local communities.
Data from the Federal Reserve Bank of Kansas City shows community banks lead in small-business lending.
In mid-2024, small-business loans made up more than double the share at community banks than at large banks.
Small firms are also more likely to receive credit approval from community banks than larger institutions.
Small businesses account for over half of US job creation and employ nearly three-quarters of workers.
Community banks also dominate agricultural lending, particularly for smaller farms.
They hold the majority of farm real estate and operating debt issued by commercial banks.
Rural areas depend heavily on community bank branches for basic financial services.
Digital asset firms are building payment systems that route transactions through stablecoin networks.
Platforms often advertise rewards using annual percentage yield language familiar to savers.
These incentives encourage users to keep funds on crypto platforms rather than in banks.
Unlike bank deposits, stablecoin balances lack federal deposit insurance.
Banking advocates warn this could pull money out of local economies into reserve-backed stablecoins.
The GENIUS Act has already barred stablecoin issuers from offering interest or yield.
Community banks say that restriction should also apply to exchanges and intermediaries.
Without an extension, platforms could still offer rewards indirectly, they argue.
Lawmakers are being asked to close this gap as legislation advances.
Protecting community bank funding is framed as essential to economic stability.
Advocates say small businesses and farmers would bear the cost of inaction.
Rural communities could lose access to locally informed lenders.
The debate comes as Treasury estimates stablecoin markets could reach trillions of dollars this decade.
Lawmakers face pressure to balance innovation with financial stability.
Community bankers argue payments innovation should not undermine core lending functions.
Allowing intermediaries to pay yield on payment stablecoins would siphon deposits from local banks and weaken Main Street lending.
Kevin Paintner said.