A Year Into the GENIUS Act, Deposit-Flight Turns Real

The variable that decides which scenario plays out is where the reserves go. The Fed note points out that reserve composition varies widely: Circle holds roughly 13% of its backing in bank deposits. Tether holds close to none. Some smaller issuers such as Gemini’s dollar park their reserves almost entirely in banks. That distinction is the whole game. If a stablecoin issuer puts its reserves back into the banking system as deposits, the money that left a community bank can recycle into the system. The net contraction is smaller. If the issuer holds Treasuries instead, the deposit leaves the banking system for good and the lending hit is real. A market dominated by issuers that favor Treasuries over bank deposits is a slow drain on bank funding rather than a reshuffling.

The exposure is not evenly distributed. The American Bankers Association cites the $6.6 trillion Treasury figure when it warns about deposit flight. The warning bites hardest for small banks because of structure. Community banks fund a disproportionate share of local lending from exactly the kind of low-cost transactional deposits that a yield-paying stablecoin targets. The Independent Community Bankers of America put the stakes in concrete terms: community banks make 60% of the nation’s small-business loans and 80% of banking-industry agricultural lending. Migrating those retail deposits into stablecoins would raise borrowing costs and impair credit availability in the communities that depend on it.

A large money-center bank can replace lost deposits with wholesale funding. A small bank in a farming county cannot. When the cheapest part of its funding base is the part most exposed to a new competing product, the squeeze shows up first in what it can lend locally.

The counterargument comes from the White House. In April 2026 the Council of Economic Advisers published a report arguing that the yield prohibition does very little to protect bank lending. It estimated that removing the ban would increase lending by only about $2.1 billion – a rounding error – and mostly at large banks rather than small ones. The implication is that stablecoin yield is not the deposit magnet the banks claim. The GENIUS Act’s restriction would be solving a problem that does not exist.

The banks’ rebuttal is that the CEA studied the wrong question. The live concern is not whether ending the prohibition would boost lending. It is whether deposits leave in the first place. The CEA’s framing largely sidesteps that. Both readings cannot be right, and the data that would settle it – actual deposit flows out of small banks into yield-paying stablecoin arrangements – is only now starting to accumulate. The total stablecoin market sits near its all-time high above $300 billion, tracked in real time on public dashboards.

The compliance build-out is becoming its own barrier. In April 2026 Treasury’s Financial Crimes Enforcement Network and the Office of Foreign Assets Control jointly proposed anti-money-laundering and sanctions rules for permitted payment stablecoin issuers under the GENIUS Act. The comment period closes on 9 June 2026. A licensed issuer must run a bank-grade compliance program. That raises the fixed cost of issuance and tilts the field toward large, well-capitalized players. That has a second-order effect on the deposit question: the issuers most able to bear that cost are precisely the ones large enough to move deposits at scale if they choose to.

The decisive variable is whether regulators close the affiliate-yield channel. If the indirect-reward model stands, the GENIUS Act becomes a deposit-flight law in practice regardless of its drafters’ intent. The Fed’s contraction scenarios become live possibilities rather than stress tests. If regulators extend the prohibition to exchanges and affiliates, the deposit threat largely deflates. Stablecoins would compete on convenience rather than yield. The banks are lobbying to close the gap through follow-on legislation. The crypto exchanges are defending the revenue line that funds their stablecoin partnerships.

The first year of the GENIUS Act settled the legal architecture. The second year will settle whether the money stays in bank accounts or moves to a token paying Treasury yield through a side door. That outcome was never going to be decided by the statute. It will be decided by how the yield rule is enforced.