Senator Gillibrand warns yield stablecoins threaten banking

U.S. Senator Kirsten Gillibrand (D-NY) urged regulators to restrict yield-bearing stablecoins, arguing they could destabilise traditional banking by reducing demand for deposits needed to fund mortgages and small business loans.

Speaking at the DC Blockchain Summit on March 26, Gillibrand emphasised the need to protect legacy financial systems through stricter oversight of stablecoin issuers.

“If stablecoin issuers offer interest, there’s no reason to put money in a local bank. Without deposits, small banks can’t provide mortgages—it will collapse the financial services system,” Gillibrand warned.

The senator co-sponsored the GENIUS Act, a stablecoin regulation bill advancing through Congress.

Updated in March to include anti-money laundering (AML) and know-your-customer (KYC) requirements, the legislation aims to establish federal oversight for digital fiat tokens.

The Senate Banking Committee approved the bill in an 18-6 vote on March 13, moving it closer to a full Senate vote.

Critics argue the GENIUS Act risks enabling financial censorship by centralising stablecoin issuance.

“Centralised stablecoins could let governments lock individuals out of the financial system,” Jean Rausis, co-founder of decentralised exchange Smardex, warned.

Gillibrand countered by advocating for New York-style regulations nationwide, citing their effectiveness in safeguarding consumers.

She stressed that stablecoin issuers should not receive protections like FDIC insurance unless they operate under banking laws.

The debate highlights tensions between innovation and systemic stability.

While yield-bearing stablecoins offer higher returns than traditional savings accounts, Gillibrand’s stance reflects concerns that unregulated alternatives could erode banking’s role in credit markets.

As the GENIUS Act progresses, its fate will hinge on balancing consumer protections with the need to preserve banking infrastructure.

Gillibrand’s remarks underscore the challenge of adapting financial regulations to emerging technologies without stifling competition.

The senator’s focus on deposit-dependent lending underscores broader fears about crypto’s impact on traditional finance.

Whether stablecoin regulations can address these risks while fostering innovation remains a central question in U.S. policy discussions.