Banking Industry Says Clarity Act Stablecoin Proposal Would Enable 'Evasion'

Senators had hoped the issue, which has plagued crypto legislation for months, had been put to bed with a proposed compromise last week.

In brief

• Top banking groups say the new Clarity Act language leaves loopholes regarding stablecoin yield.
• The compromise would ban direct yield on stablecoins but still allow some rewards tied to account balances.
• The banks' statement comes as senators prepare for a long-delayed committee vote on the Clarity Act.

A coalition of the nation’s top banking trade groups, representing Wall Street giants and community banks alike, issued a statement Friday expressing concern that new language in a major crypto bill would benefit digital assets companies and disrupt the traditional banking industry.

For months, the banking industry and the crypto lobby have battled over key language in the Clarity Act, a bill that would formally legalize most crypto activity in the United States.

Banks want to add language to the legislation banning crypto companies from offering yield on stablecoins, cryptocurrencies pegged to the value of the U.S. dollar. The banks say such programs could make traditional, low-yield savings accounts less attractive; crypto companies, including Coinbase, have argued they should be able to compete with traditional finance.

For nearly four months, the skirmish over stablecoin yield has kept the Clarity Act from advancing in the Senate. Last week, two key lawmakers on the Senate Banking Committee finally revealed a proposed compromise on the issue, which crypto leaders quickly embraced.

Senators soon after signaled optimism that the problem was dealt with, and that a committee vote on the Clarity Act was near at hand.

But now, a united front of top banking trade groups is asking for further changes to the proposed language, arguing the current draft contains loopholes that would allow crypto companies to evade the intended prohibitions on stablecoin yield.

The compromise language, drafted by Senators Thom Tillis (R-NC) and Angela Alsobrooks (D-MD), would prohibit the payment of rewards on stablecoins in a manner that is “economically or functionally equivalent to the payment of interest or yield on an interest-bearing bank deposit.”

But it would also potentially greenlight rewards tied to participation in governance, validation, and staking—and rewards calculated by referencing a user’s account balance.

Today, six banking trade groups, representing all major national banks and community banks in all 50 states, wrote a letter to the Senate Banking Committee arguing that those exceptions are overbroad.

“We are concerned… that the proposed language includes exceptions that will enable evasion of the intended prohibition and incentivize customers to hold and grow stablecoin balances at the expense of deposits,” the groups said.

The letter includes specific asks about rewording the stablecoin yield language—including striking the ability for rewards to reference account balances in any way, and changing the prohibition on payments “economically or functionally equivalent” to yield, to a prohibition on payments “substantially similar” to yield.

The letter lists numerous potential stablecoin rewards programs the banking groups say could exist under the proposed language that would violate the spirit of a potential compromise. Those include payments structured like a money market mutual fund, payments of a flat monthly reward that increases with account balance increases, and payments based on account balance but triggered by making a certain number of monthly transactions.

When banks first floated concerns about the new language earlier this week, Sen. Tillis replied in a statement that he and Sen. Alsobrooks “respectfully agree to disagree”—signaling the lawmakers were willing to proceed with a committee vote on the bill regardless.

Decrypt reached out to the two senators regarding the more granular concerns raised today by the banking trades, but did not immediately receive a response.

Time is of the essence for supporters of the Clarity Act, which senators on the Banking Committee have promised would be considered next week or the week following.

The Senate is only in session for two weeks this month, and will soon grind to a halt in advance of November’s midterm elections. Sen. Bernie Moreno (R-OH), a pro-crypto member of the Senate Banking Committee, recently urged that if the bill does not pass this month, “digital asset legislation will not pass for the foreseeable future.”

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