Summary
- Eight banking trade organizations have requested Senate leaders to impose stricter regulations on stablecoin rewards.
- They propose eliminating provisions that permit rewards based on account balances, duration, or tenure.
- The groups argue that a proposed safeguard against deposit flight would be implemented too late.
On Monday, eight banking trade associations urged Senate leaders to enhance the restrictions on stablecoin rewards outlined in the Clarity Act. They contend that certain exceptions in the legislation could facilitate interest-like payments that might divert deposits from traditional banks.
In a letter addressed to Senators John Thune and Chuck Schumer, the organizations expressed their inability to support the latest changes to the Clarity Act regarding rewards for transactions using stablecoins, which are digital tokens typically pegged to the U.S. dollar. They called for more stringent limits on payments associated with how much customers hold or the length of time they hold their stablecoins.
Myriad: Will Congress pass the Clarity Act? Click to make your prediction.“We support this distinction in principle, but we believe the current legislative language contains loopholes that could allow for interest and interest-like payments on stablecoin balances,” the letter stated.
The letter was signed by notable organizations such as the American Bankers Association, Bank Policy Institute, and Independent Community Bankers of America, which represent both large and community banks. This correspondence comes ahead of a significant Senate procedural vote scheduled for Tuesday, following the unveiling of a revised Clarity Act.
While the proposed legislation aims to set federal guidelines for digital assets and clarify the responsibilities of regulators, the banking groups want to remove the word “solely” from a restriction concerning payments linked to holding stablecoins. They also propose replacing an equivalence standard with a “substantially similar” test, thereby broadening the restriction to include incentives that mimic deposit interest.
Additionally, they seek to eliminate language that permits rewards to be contingent upon a customer’s balance, duration, or tenure.
“Since interest payments are often calculated based on duration, balance, and tenure, this subsection seems to contradict the initial prohibition,” the organizations pointed out.
The banking groups argue that such incentives could siphon off funds that are essential for financing mortgages, agriculture, and small enterprises. They noted that community-focused lenders could be especially vulnerable to these risks, although they did not provide specific estimates of potential outflows or evidence of reduced lending as a result.
Moreover, the groups dismissed a proposed “circuit breaker” designed to address deposit flight, asserting that it would only allow regulators to respond after significant outflows had already occurred.
“A circuit breaker that triggers only after substantial deposit flight has taken place is not a safeguard at all,” they stated. “Congress should proactively address this risk by ensuring the Clarity Act prohibits stablecoin rewards and incentives that operate like deposit interest, instead of waiting for damage to banks, borrowers, and communities before regulators can act.”
This letter echoes demands made by six banking trade groups in May, which included calls for restrictions on rewards based on account balances and the adoption of a “substantially similar” standard.
The debate has now spread to the home states of senators, where community bankers are advocating for stricter regulations while cryptocurrency advocates are rallying support for the bill. Crypto firms argue for the continuation of stablecoin rewards and emphasize the necessity for clearer federal regulations.