Today, 148 community banks operate across the Commonwealth, serving farmers, small-business owners, and families. I’ve spent my career in community banking. We know our customers, and we put their interests first. The success of these banks is no coincidence. It stems from a simple model: deposits flow in, and loans are issued out to support local growth.
However, this model is now at risk due to a loophole in federal law. The GENIUS Act, signed into law by President Trump, aimed to encourage innovation while setting safeguards for the growing crypto industry. Most importantly, it prohibited stablecoin issuers from paying interest to holders. Stablecoins were created as a modern payment tool, not to replace deposits in community banks or money market funds.
Unfortunately, almost immediately after the law was passed, companies began finding ways around it. While stablecoin issuers are barred from paying interest, affiliates and exchanges started offering “rewards” and yield programs to stablecoin holders. These programs are essentially the same as the interest payments Congress aimed to ban.
In other words, what Congress clearly prohibited directly is now being done indirectly.
If this loophole remains open, the consequences could be profound. The Treasury Department has warned that up to $6.6 trillion in deposits nationwide could shift into stablecoins if unregulated interest-like programs continue to grow. That is not a theoretical concern — that is a direct threat to the deposits that make community lending possible.
Research from the Federal Reserve Bank of Kansas City shows that every $1 shift from banks to stablecoins reduces bank lending by about 50 cents. For Kentucky, where community banks fund everything from agricultural loans to small-town startups, such a reduction would be devastating.
And the damage would not be felt equally. It would hit underserved and rural communities the hardest. Kentucky’s community banks are often the only financial institutions serving these areas. If their deposits decline, interest rates will rise, loan availability will decrease, and families and small businesses will suffer the most. Stablecoin issuers, unlike banks, do not have Community Reinvestment Act obligations. They are not required to lend locally. Deposits that leave Kentucky communities for unregulated digital platforms are unlikely to ever return.
Congress must close this loophole before real damage is done. That involves clarifying that interest-like “rewards” offered through affiliates or exchanges break the intent of federal law. Lawmakers must also ensure that any entity performing bank-like functions is subject to similar oversight and that it protects the deposits on which community banks depend. Innovation is encouraged — but regulatory arbitrage is not.
Kentucky’s community banks have supported our state for generations, not because they follow trends, but because they invest in people. They deserve a level playing field.
Congress must close the stablecoin loophole — before real harm impacts the people and places that keep Kentucky strong.
State Rep. Michael Meredith (R-Oakland) serves as chair of the Kentucky House Banking & Insurance Committee – and is a longtime loan officer with a local community bank in South Central Kentucky.