Alabama Senator Raises Concerns Over GENIUS Act’s Impact on Small Banks
Keith Kelley, Republican state senator for Alabama’s 12th district, has issued a warning regarding the GENIUS Act—a federal stablecoin regulation law signed by President Donald Trump in July. In an op-ed published by 1819 News, Kelley highlighted a loophole in the legislation that could threaten the stability of small community banks, especially in rural areas like those in Alabama.
Kelley pointed out that the GENIUS Act permits cryptocurrency platforms to offer financial incentives, potentially encouraging customers to withdraw funds or close accounts at local banks. Since community banks rely heavily on local deposits to fund their lending activities, a decrease in deposits could severely limit their ability to provide loans to individuals, families, and small businesses.
“For our rural farming communities in particular, where margins are thin and seasonal cash flow is critical, the loss of a trusted lending partner could be devastating,” Kelley stated.
Loophole in Yield Restrictions Raises Regulatory Concerns
The GENIUS Act explicitly prohibits payment stablecoin issuers—both domestic and foreign—from paying any form of interest or yield directly to stablecoin holders. However, the legislation does not explicitly ban yield distribution through affiliated cryptocurrency exchanges or platforms, creating a potential loophole.
Kelley criticized this regulatory gap as “regulatory arbitrage,” arguing that allowing crypto companies to offer yield-bearing products without adhering to traditional banking regulations endangers local economies.
Supporting these concerns, the Bank Policy Institute warned in August that the GENIUS Act could trigger up to $6.6 trillion in deposit withdrawals from traditional banks, disrupting credit availability in communities reliant on local banks.
Ongoing Regulatory Process and Competitive Challenges
Though the GENIUS Act was signed into law on July 18, it has yet to take full effect. The US Treasury and Federal Reserve are tasked with finalizing regulations, a process that began with a public comment period focused on preventing illicit financial activities.
Experts like Timothy Massad, former chair of the US Commodity Futures Trading Commission, have flagged additional issues, including the Act’s allowance for foreign stablecoin issuers to operate under vaguely defined “comparable” regulatory regimes. This could disadvantage US-based issuers by imposing stricter rules domestically.
Efforts by banking groups to amend the GENIUS Act’s provisions are ongoing, but it remains unclear how these regulatory challenges will be resolved.
As of publication, Senator Kelley had not responded to requests for further comment.
FinOracleAI — Market View
The concerns raised about the GENIUS Act’s potential to drive deposit outflows from community banks introduce near-term risks to regional banking sectors, particularly in rural areas. If crypto platforms exploit yield loopholes, small banks could face liquidity pressures, constraining credit to local economies.
However, the law’s regulatory framework is still under development, and outcomes depend heavily on forthcoming Treasury and Federal Reserve rules. Market participants should monitor regulatory clarifications and any legislative amendments addressing these loopholes.
Impact: negative
