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.