BPInsights: August 16, 2025

Closing the Payment of Interest Loophole for Stablecoins

As policymakers consider digital asset market structure legislation, it is important that the requirements in the GENIUS Act, now signed into law, prohibiting the payment of interest and yield on stablecoins are not evaded or undermined.

Background

Payment stablecoins do not substitute for bank deposits, money market funds or investment products, and payment stablecoin issuers are not regulated, supervised or examined in the same way. These distinctions are why payment stablecoins should not pay interest the way highly regulated and supervised banks do on deposits or offer yield as money market funds do.

• Bank deposits are an important source of funding for banks to make loans, and money market funds are securities that make investments and subsequently offer yield. Payment stablecoins serve a different purpose, as they neither fund loans nor are regulated as securities.

Flight risk and opportunity cost

The Wall Street Journal recently reported that the Treasury Borrowing Advisory Committee issued a report in April estimating that stablecoins could lead to as much as $6.6 trillion in deposit outflows, depending on whether stablecoins are able to offer interest or yield. With affiliates of stablecoin issuers or exchanges still being able to pay interest on stablecoins, the risk of significant deposit flight is even greater.

• Why it matters: Banks power the economy by turning deposits into loans. Incentivizing a shift from bank deposits and money market funds to stablecoins would end up increasing lending costs and reducing loans to businesses and consumer households.

Potential for evasion

The GENIUS Act contained a prohibition on stablecoin issuers offering interest or yield, as well as other financial and non-financial rewards, to holders of stablecoins. However, without an explicit prohibition applying to exchanges, which act as a distribution channel for stablecoin issuers or business affiliates, the requirements in the GENIUS Act can be easily evaded and undermined by allowing payment of interest indirectly to holders of stablecoins.

These arrangements between stablecoin issuers and affiliates or exchanges, often jointly and explicitly marketed to consumers, will undermine the GENIUS Act's prohibition regarding payment of interest and yield. The result will be greater deposit flight risk, especially in times of stress, that will undermine credit creation throughout the economy. The corresponding reduction in credit supply means higher interest rates, fewer loans and increased costs for Main Street businesses and households.

Bottom line: Congress must protect the flow of credit to American businesses and families and the stability of the most important financial market by closing the stablecoin payment of interest loophole.

Five Key Things

1. Flawed NGFS Climate Model Still in Use Despite Data Error and Statistical Flaws

The Network for Greening the Financial System is still using a climate damage model to project global losses from climate change despite flawed data that tripled its loss estimates and serious statistical issues. Even though the data error was confirmed and the academic paper the damage model is based on is still formally flagged for review by Nature, the NGFS has not withdrawn the model or issued any warning.

Background: The NGFS is a consortium of central banks and other regulatory supervisors across the globe. It develops climate scenarios used in bank stress tests, which can influence regulatory targets, fines and capital requirements. U.S. regulators, though no longer members, have previously used NGFS scenarios in climate risk exercises.

What's happening now: In November 2024, NGFS adopted a new damage function based entirely on one Nature paper published earlier that year. The model predicted a 19% loss in global real income by 2050 and a 60% loss by 2100. About a month later, a BPI study identified serious statistical flaws in the model. It was then recently revealed that the damage function also contained a simple data error that inflated loss numbers by roughly threefold. The NGFS could have - and should have - known about the error before adopting the model, and could have acted when the paper was publicly flagged by Nature. However, in response to the data error, the authors of the Nature paper illegitimately changed their methodology to restore the original high loss estimates, leaving the underlying statistical flaws in the damage model intact.

Why it matters: Some have pointed to NGFS scenarios as justification for stricter climate targets and higher capital requirements. Inaccurate models risk distorting public policy and imposing unnecessary costs on banks.

The fix: NGFS should immediately retract the damage function from its climate scenario toolkit. The NGFS must also review and correct its procedures for putting its climate models into production to prevent a model with a serious data error and faulty statistical reasoning from again being adopted, especially when it should have been caught.

2. Banks Respond to FTA Letter that Seeks to Mislead Trump Administration about Open Banking

The Financial Technology Association teamed up with an interesting mix of data aggregators and fintech companies to issue a letter to the President on Thursday urging the Administration to undermine free markets and engage in government price fixing. The Bank Policy Institute, American Bankers Association and Consumer Bankers Association issued this response:

Banks don't charge consumers fees to access their data, and because of banks' innovation and investments in secure systems, consumers have access to more financial products and secure services than ever. Today's letter is another extraordinary example of data aggregators and middlemen trying to mislead the Administration into supporting Biden-era policies for personal profit and the right to free ride off the major investments banks have made in protecting consumers' data. The double standard these companies want to perpetuate, where they may charge fees for service while banks are expected to provide the same service to these private companies for free, is absurd. The Administration has taken bold actions to strengthen U.S. competitiveness, enable innovation and protect consumers from bad actors. We look forward to seeing a personal financial data rights rule that comports with the statute, protects consumers and ensures a level playing field to encourage innovation, a process the Consumer Financial Protection Bureau has already begun.

Here are the facts:

• Banks have strongly supported the Administration's effort to rescind regulatory restrictions on banks engaging with crypto companies.
• Banks have also strongly supported the White House's efforts to enable A.I. innovation.
• Over 120 data aggregators currently connect financial data across providers. Plaid alone connects to more than 200 million bank accounts.
• Financial Data Exchange, a nonprofit created through a bank-fintech partnership, has built a secure API linking more than 114 million accounts.
• Banks process billions of requests from large fintech companies every single month. Processing these requests comes at a cost.
• Charging for API access is standard for almost every major company, including Amazon Web Services, Microsoft Azure, X (formerly known as Twitter), Google, and others, including companies represented in the FTA letter.

3. Proposed Changes to Large-Bank Ratings System Would Align Ratings with Real Financial Condition

The Bank Policy Institute and the American Bankers Association expressed support for proposed changes to the Large Financial Institution rating system in a letter today to the Federal Reserve. The current rating system fails to accurately reflect bank performance, the associations argued, and unnecessarily constrains banks' ability to serve their customers.

"If report cards worked like the current LFI ratings framework, a student's GPA would equal their lowest grade," the associations stated after filing the letter. "This wouldn't give a complete picture of a student's performance, and the current LFI ratings approach doesn't give a complete picture of bank condition. We're grateful the Federal Reserve is improving the usefulness of this framework so that it can more reliably spot and address actual risks."

The LFI rating system is a rubric used by the Federal Reserve to assess how well a bank is managed based on three components: (1) capital planning and positions; (2) liquidity risk management and positions; and (3) governance and controls.

Under the current rating system, a bank is deemed less-than-satisfactory and not "well-managed" if any one of the three components is rated unsatisfactory, even if the other two ratings and the bank's overall financial health are strong. Receiving an unsatisfactory score limits banks' ability to serve their customers by expanding their products, services or branch networks, engaging in new investments or acquisitions or conducting internal reorganizations.

Over two-thirds of large banks were rated as unsatisfactory because of this framework, despite repeated statements from regulators that large financial institutions, and the banking system as a whole, remain strong and resilient.

To address the disconnect, the associations endorsed the Federal Reserve's proposal and urged the agency to adopt the proposed changes without delay.

In addition, the associations recommended that the Federal Reserve, along with the FDIC and OCC, adopt several additional changes to the bank ratings framework:

• Focus on objective, material financial risks. Banks are in the business of managing financial risk, and the rubric used to evaluate their performance should prioritize material risks and apply objective, transparent standards.

• Adopt similar changes to other rating frameworks. The banking agencies' CAMELS rating system for banks should also be revised to focus on financial risk and eliminate the outsized effect of the "Management" rating. The Federal Reserve's rating systems for smaller banks and foreign banking organizations should undergo similar reforms.

• Implement greater due process and transparency in ratings. Regulators should provide more transparent explanations of findings so banks can better understand and resolve issues, and banks that have been downgraded should be offered a meaningful appeal process.

• Consider economic growth when defining a "large financial institution." LFI ratings generally apply to bank holding companies and intermediate holding companies with over $100 billion in total consolidated assets. That threshold should be indexed to inflation and economic growth. 

To access a copy of the letter, please click here.

4. Banks Ask Court to Clarify Compliance Expectations Under Section 1033

BPI, the Kentucky Bankers Association and Forcht Bank filed a motion this week with the U.S. District Court for the Eastern District of Kentucky asking the court to clarify that banks will not have to comply with the existing Section 1033 rule while the CFPB works to substantially revise the rule.

"Unless the Court acts, banks will be forced to begin investing time and resources to build systems to comply with a regulation that will soon be replaced," stated Paige Pidano Paridon, BPI Co-Head of Regulatory Affairs. "This is a straightforward and common-sense procedural matter, and we are asking the Court to act to avoid unnecessary cost and confusion."

BPI, KBA and Forcht Bank brought a challenge to the CFPB's rule in October 2024 on the grounds that the rule exceeded the Bureau's authority and put sensitive consumer financial data at risk. The CFPB petitioned the court to stay the litigation on July 29, stating that it intends to initiate a new rulemaking process promptly, beginning with an advance notice of proposed rulemaking. Judge Danny Reeves granted the stay and ordered the CFPB to provide the court with a status update on its progress every 45 days. Despite the planned rulemaking, the order did not address compliance expectations with respect to the existing rule.

The motion requests the court to stay the Rule's compliance deadlines and enjoin the Rule's enforcement until one year following the conclusion of this litigation. Without court action, some banks will be required to comply with the existing Section 1033 rule beginning in summer 2026.

To access a copy of the filing, please click here.

5. Community Bank Capital, Supervision, Fraud: Highlights from Vice Chair Bowman's Recent Remarks

Federal Reserve Vice Chair for Supervision Michelle Bowman called in a recent speech to consider community bank issues as the Fed embarks on regulatory and supervisory reforms. The Fed has already begun examining parts of the bank regulatory framework unique to community banks, including the community bank leverage ratio, which Bowman said is "a good example of a well-intentioned measure that underachieved in providing regulatory relief." The Fed is also looking at liquidity sources and regulatory expectations and rethinking capital options and operations for mutual banks, Bowman said.

• Modifications: Bowman called for considering modifications to the CBLR framework that would encourage more banks to adopt it. "We should also consider whether it was appropriately designed and calibrated to fulfill the Congressional intent to achieve regulatory relief," she said.

• Supervision: She referred to the Fed's recent announcement that reputational risk will no longer be considered in bank examination, and noted related efforts to reform supervision, such as "changes to provide transparency and efficiency in the supervisory process, better defining 'safety and soundness,' reviewing and updating relevant asset thresholds used in establishing supervisory categories and regulatory requirements, and rationalizing and updating Bank Secrecy Act and anti-money-laundering requirements."

• Liquidity: Bowman indicated that there was no reason to expect banks to use the discount window as a "daily liquidity source" when FHLB advances were a lower-cost alternative. She also indicated that requiring banks to maintain collateral at the discount window might be "a solution in search of a problem."

• Fraud: Bowman emphasized the need for information-sharing and coordinated strategies among industries and government stakeholders to address payments and check fraud, the subject of a pending request for information from the banking agencies. She noted that "liability for fraud may not always rest with those best positioned to prevent or detect it."

• Inviting perspectives: Bowman said the Fed will host a conference on Oct. 9 focused on community banking to "ensure that our work is fully informed."

In Case You Missed It

Senators Call for MRAs to Be Accountable and Adhere to Legal Limits

A group of Republican senators led by Sen. Katie Britt (R-AL) urged the federal banking agencies in a recent letter to consider flaws in Matters Requiring Attention, a form of supervisory action that has become unmoored from the statute. The senators expressed concern that "the lack of structure, uniformity, and legal basis has allowed the MRA process to become increasingly opaque, ineffective, and inconsistent." They noted that MRAs are being treated as binding requirements despite their origin in informal guidance rather than explicit law or regulation. They also expressed concern that banks have no formal path to challenge MRAs, and about the absence of a true "materiality threshold" underpinning the actions, which may dilute their effectiveness as a supervisory tool.

Recommended steps: Banking regulators should reconsider current definitions and establish clear standards and expectations for issuing and resolving MRAs, subject to a formal rulemaking, the lawmakers recommended. They urged that the standards be uniform across federal banking agencies and be based on safety and soundness. They also suggested that regulators consider if changes are warranted to the confidential supervisory information framework, which bars banks and agencies from disclosing MRAs.

Draft Paper: 'Debanking Debate' Has Roots in Regulation

A new draft paper by University of Wyoming law professor Julie Andersen Hill identifies regulatory factors that fuel the "debanking debate": regulators' discretionary supervisory power to engage in debanking, and secrecy of supervisory actions. "Under the guise of reputation risk, anti-money laundering laws, or general concern about uncooperative bank management, bank regulators have the power to influence bank decisions for political reasons," Hill wrote in the paper. "To stop the debanking debate, reforms must address both regulatory discretion and secrecy," the paper recommends. The paper suggests ending regulators' ability to punish banks for reputational risk, reforming anti-money laundering laws, limiting penalties for noncompliance with regulator recommendations and suggestions. It also recommends that Congress require regulators to release more supervisory information and require banks to disclose reasons for customer account decisions. The draft paper is forthcoming in the Texas A&M Law Review.

FTC Warns Of Alarming Surge In Scams That Target Seniors

The Federal Trade Commission warned in a recent report that a growing wave of scams is targeting senior citizens' life savings. Older adults consistently report significantly higher losses from fraud and scams compared to younger adults, according to the FTC. Fraudsters use various tactics to exploit seniors, including impersonating trusted government agencies, banks or tech providers. The scams often rely on phone calls.

• By the numbers: In 2024, older Americans reported losing $445 million in scams over $100,000, $214 million in scams between $10,000 and 100,000 and $41 million in scams over $10,000. The number of reports about victims losing over $100,000 at once increased nearly sevenfold from 2020-2024. These numbers may represent only the tip of the iceberg, as many scams go unreported.

eSLR Reform Aligns Leverage Requirement with Original Objective

Note: An earlier version of this note included a mistaken statistic, which we have now corrected.

When regulators introduced the eSLR in 2014, policymakers cautioned that it might become unduly binding and push banks toward riskier assets. Concerns were largely eased at the time based on the assumption that the eSLR would merely serve as a capital backstop, and reserve balances would shrink as the Fed unwound its crisis-era balance sheet. This change was also expected to ease binding constraints already facing several institutions.

It didn't.

Instead, the Fed began to oversupply reserve balances starting in 2019, and expanded its balance sheet even further during the pandemic. As a result, the leverage ratio has become more binding than regulators anticipated, forcing leading banks to limit crucial activities in Treasury markets, especially during times of stress, without improving financial stability.

Our blog post explores why the latest proposed recalibration - introduced on June 17 - will better balance safety with supporting healthy market activity.

The Crypto Ledger

Here's the latest in crypto.

• Paxos Joins Spate of Crypto Companies Applying for US Trust Bank Licenses. Paxos, the company that issues PayPal's stablecoin PYUSD, has applied for a national trust bank charter, following similar moves by fellow crypto companies Circle and Ripple. Paxos had previously applied for a trust charter in 2020.
• SEC's Peirce Says Market Will Sort Out Winners in Tokenization. Market forces will ultimately determine which forms of tokenized assets will succeed, SEC Commissioner Hester Peirce said this week in a Bloomberg TV interview. "We're willing to work with people who are taking different approaches," Peirce said. "We're looking forward to working with folks to try those different models out and see what the markets like." She emphasized that companies must properly disclose the nature of the assets being tokenized to investors.
• Crypto Founder Do Kwon Pleads Guilty to US Fraud Charges. Terraform Labs founder Do Kwon, whose collapsed TerraUSD token sparked a crypto market meltdown, pleaded guilty this week to two fraud counts in a plea deal with U.S. authorities. The South Korean national reversed a previous not-guilty plea he had made after being extradited to the U.S. from Montenegro in December.

Media Reports: Fed Chair Search Broadens

The White House is considering a range of candidates to succeed Federal Reserve Chair Jerome Powell when his term ends in May, according to media reports this week. Interviews with Treasury Secretary Scott Bessent are underway, according to the reports. The following candidates have been named by the media:

• Fed Governors Christopher Waller and Philip Jefferson
• Michelle Bowman, Fed vice chair for supervision
• Lorie Logan, Dallas Fed president
• Kevin Hassett, National Economic Council director
• Former Fed Governors Kevin Warsh and Larry Lindsey
• James Bullard, former St. Louis Fed president
• Rick Rieder, chief investment officer for global fixed income at BlackRock
• David Zervos, chief market strategist at Jefferies
• Marc Sumerlin, former senior economic official in the George W. Bush administration
• Stephen Miran, new Fed Board nominee and CEA chairman

CFPB Considers Potential Rule Changes on 'Larger Participant' Nonbank Supervision

The CFPB late last week issued four advanced notices of proposed rulemaking soliciting comments on whether to amend "larger participant" rules, which govern how certain nonbank financial companies are supervised. The CFPB may consider limiting supervision of nonbank companies in auto financing, consumer credit reporting, debt collection and international money transfers to the very largest entities. Comments on the advanced notices for proposed rulemaking are due by Sept. 22.

The current thresholds include:

• Auto Financing: Nonbanks originating at least 10,000 auto finance transactions annually.
• Consumer Reporting: Nonbanks with over $7 million in annual receipts resulting from relevant consumer reporting activities.
• Debt Collection: Nonbanks with over $10 million in annual receipts from debt collection activities.
• International Money Transfers: Nonbanks handling at least 1,000,000 annual international money transfers.

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