Banks Fight To Kill Stablecoin ‘Yield Loophole’ – Will Crypto Take Over?

On May 14, 2026, the CLARITY Act passed the Senate Banking Committee with a vote of 15-9. However, the biggest obstacle to it becoming law wasn’t opposition from those skeptical of cryptocurrency or the SEC. It was the American Bankers Association (ABA). The ABA launched an urgent lobbying effort in April and May to eliminate what they call a “loophole” in the bill related to stablecoins. This provision would allow crypto exchanges to offer rewards on stablecoin balances. The ABA believes yield-bearing stablecoins could dramatically increase the market—from $300 billion to $2 trillion—at the cost of traditional bank deposits, potentially reducing banks’ ability to lend by 20% or more. This isn’t a fight about protecting consumers or ensuring financial stability; it’s about banks defending their current, low-interest checking account model against a potentially better alternative. This crucial political battle isn’t being explained adequately to the public.

Summary

What the loophole actually is

As an analyst, I’m watching the CLARITY Act closely, and one particular part has become the biggest point of contention in crypto legislation this year. A lot of reporting just calls it the “stablecoin yield provision” without diving into the details, but understanding those specifics is crucial – they’re what the whole debate really centers around.

The GENIUS Act of 2025 created federal rules for stablecoins, and a key part of those rules prevents stablecoin companies from offering interest or rewards on stablecoins used for payments. This applies to major issuers like Circle (USDC), Tether (USDT), Ripple (RLUSD), and Paxos. The goal of this rule is to ensure stablecoins function primarily as a way to make payments, and don’t compete with traditional bank savings accounts.

The CLARITY Act, as written, would allow cryptocurrency exchanges and companies handling digital assets to offer rewards for holding stablecoins with them, even if the stablecoin itself doesn’t earn interest. A recent agreement between Senators Tillis and Alsobrooks clarified the original proposal. This compromise prevents rewards that act like traditional interest earned on bank deposits. However, it *does* allow rewards for users who actively participate in exchange programs – for example, rewards based on how long they’ve been a member or the amount of stablecoins they hold.

The banking industry is currently contesting a specific part of the new regulations. The American Bankers Association argues that a platform offering a 4% reward for holding USDC within its program is essentially the same as a bank offering 4% interest on a checking account. Whether the reward is based on account balance or user activity doesn’t change the fact that customers are earning a return on their money, moving funds to these platforms, and consequently, banks are losing deposits.

As a crypto investor, I understand the banks are right – there’s a flaw in how the GENIUS Act was originally written. Now, whether lawmakers actually *fix* that flaw is what’s causing all the delays with the CLARITY bill in the Senate Banking Committee. It’s become a political battle, honestly.

The deposit flight argument

The American Bankers Association’s main concern with the CLARITY language is the possibility that people will withdraw their deposits, and their reported figures on potential losses are significant enough to warrant close consideration.

A recent study commissioned by the American Bankers Association (ABA) predicts significant growth in the stablecoin market. Published on April 13, 2026, the study estimates that stablecoins offering interest could expand the market from its current $300 billion to $2 trillion in just a few years. The ABA believes this growth would primarily come from people moving money out of traditional bank accounts – especially checking and money market accounts that offer low or no interest – and into these yield-bearing stablecoins.

In early May, several banking industry groups—including the American Bankers Association and others—sent a letter to leaders of the Senate Banking Committee. They warned that if stablecoins offering interest become widely used, it could lead to a significant drop—potentially 20% or more—in loans available to consumers, small businesses, and farmers.

The often-quoted figure highlights a significant potential economic issue. A 20% decrease in banks’ ability to lend would have a major impact on the economy. Banks primarily fund loans – including those for businesses, homes, farms, and small businesses – using money deposited by customers. If customers move their deposits to stablecoins that offer higher returns, the amount of money banks have available to lend will decrease accordingly. Banks believe this isn’t a minor problem, but a fundamental risk to how credit works in the United States.

The idea makes sense on the surface. The FDIC’s review of the bank failures in spring 2023 (Silicon Valley Bank, Signature Bank, and First Republic) revealed that depositors with large, uninsured amounts of money were much quicker to withdraw their funds when banks faced difficulties, compared to regular depositors with insured accounts. This pattern indicates that banks may be understating the risk of deposit runs, especially among those with significant uninsured balances and those who carefully monitor their cash.

The argument about people moving their deposits overlooks a key point: interest rates on checking and savings accounts are extremely low. Currently, the average checking account earns just around 0.07% interest, while savings accounts average about 0.43%. These rates have remained near zero since the 2008 financial crisis, and haven’t increased significantly even with the Federal Reserve raising interest rates to over 5% in 2024.

For over ten years, the difference between what banks pay people to keep their money with them and what banks earn from lending that money out has been a major source of profit. Banks essentially borrow money at almost no cost and then lend it at much higher rates, keeping the difference as profit. This system works so well for banks because people haven’t had any good alternatives for earning interest on their savings.

Stablecoins that earn interest, backed by US Treasury bonds, can currently offer returns of 3 to 5 percent. This means someone with $10,000 in a typical checking account earning no interest is missing out on around $400 per year. For someone with $100,000 spread across different bank accounts, that lost income could be around $4,000. If a similar, reliable option existed, most people would likely choose the option earning 4 percent interest over a traditional bank account with no returns.

Okay, so here’s how I understand the banks’ concerns about this new crypto stuff. They’re worried people will move their money *out* of traditional banks and into things that offer better returns. Honestly, it makes sense! They’re basically saying customers are finally realizing their deposits could be earning more all along, and they’re going to chase those better opportunities. It’s not necessarily a bad thing – people are just being smart with their money, seeking out a better deal.

What the banks are actually defending

To fairly explain the banking industry’s stance, it’s important to understand what banks are trying to safeguard.

Banks are primarily focused on maintaining their profitable business model around checking accounts that don’t earn interest. Currently, American banks hold around $17 trillion in customer deposits, and a large amount of that is in checking accounts or savings accounts that earn very little or no interest. Because banks have paid almost no interest on these deposits for over ten years, they can lend that money out at standard rates and consistently generate significant profits.

If stablecoins that offer returns of 4 to 5% became common and easy to use, people would have less reason to keep their money in traditional bank accounts that earn no interest. This would put banks in a difficult position: they could either increase the interest rates they offer on deposits to stay competitive – which would lower their profits – or risk losing customers to these stablecoin options, potentially forcing them to borrow money at higher costs or reduce the amount they lend out.

Banks are also concerned about maintaining their regulatory advantages. Banks operate under strict rules – things like capital requirements, liquidity standards, deposit insurance, and compliance with laws designed to prevent money laundering – that stablecoin companies don’t face to the same degree. The proposed CLARITY Act could allow stablecoins to compete with traditional bank deposits without requiring stablecoin issuers to meet the same regulatory demands. Banks believe this would create an unfair competitive disadvantage, and there’s a valid point to their concern.

Banks also safeguard their vital role in how loans are made. Currently, most US banks fund loans by using customer deposits. If people move money into stablecoins instead, banks will need to find new ways to fund those loans. This could mean borrowing money at higher costs, reducing the amount of lending they do, or a combination of both. While the American Bankers Association estimates lending could decrease by 20% or more, this figure is debated but remains a reasonable concern.

Beyond profits, banks are also working to maintain their political influence. Because banking is so heavily regulated, banks have spent years cultivating strong relationships with lawmakers, regulatory bodies, and the Federal Reserve. This established political network gives them considerable power when it comes to shaping financial laws. Allowing stablecoins to rival traditional deposits could gradually transfer some of that power to the cryptocurrency industry, which banks have often resisted. Essentially, banks aren’t just protecting their business; they’re safeguarding the political system that supports it.

There’s nothing inherently wrong with industries advocating for their own interests – banks, for example, naturally want to ensure stable funding, fair regulations, and a secure financial system. The issue isn’t that banks are defending their position, but rather *how* they’re presenting it. They’re framing their actions as being about protecting consumers and the financial system, when really, they’re primarily trying to protect their current way of making money from new competition.

The crypto industry’s response

The cryptocurrency industry has responded very strongly to the ABA’s campaign, which is surprising given how cautious the industry usually is with public statements.

As a crypto investor, I’ve been following the debate around stablecoin regulation closely. Coinbase’s legal chief, Paul Grewal, recently pointed out something important: banks already got what they wanted with the GENIUS Act, which stopped stablecoin companies from offering direct yield. He basically said they won that battle, even though it meant less opportunity for consumers. Now, with the CLARITY Act offering a compromise on rewards, Grewal feels like banks are being overly demanding and should be satisfied with what they’ve already achieved. It feels like they’re constantly moving the goalposts!

As an analyst, I’ve been following the debate around this legislation closely, and I found the response from Cody Carbone, Chief Policy Officer at The Digital Chamber, particularly pointed. He essentially accused the banking industry of waiting until the very last minute – right before the markup – to voice their concerns. It seems they had months during bipartisan negotiations to shape the language, but chose to launch a last-ditch effort at the eleventh hour, which Carbone characterized as frankly arrogant.

The crypto industry has two main points against the ABA’s concerns. First, they believe the worry about money leaving banks is exaggerated. Banks could easily attract and keep customers by offering competitive interest rates on checking accounts. For example, if banks offered 3% interest, stablecoins offering yields wouldn’t seem as appealing. The fact that banks haven’t raised rates, even with consistently high federal interest rates, is a deliberate decision, not something they’re forced to do.

Furthermore, the idea that banks are the only source of lending overlooks the significant growth of non-bank lenders in recent years. Private credit funds, financial technology companies, online lending platforms, and even new stablecoin-based lending options are now providing credit outside of traditional banks. Similarly, the concern about people withdrawing deposits from banks assumes banks are essential and irreplaceable. However, money tends to flow towards the most productive investments, and banks’ central role in the economy has been steadily decreasing.

The White House generally supports the crypto industry’s stance on this issue. Patrick Witt, who leads the President’s Council on Digital Assets, publicly stated that the American Bankers Association (ABA) was too late with its lobbying efforts. He pointed out that the bankers had the opportunity to discuss the compromise language with the White House back in February but didn’t take it. The administration believes the agreement between Senators Tillis and Alsobrooks is complete and that the ABA is now trying to reopen a discussion that has already been decided.

Why the compromise still leaves space the banks oppose

The current proposal, a compromise between crypto and banking groups, is the product of months of discussion. It’s been revised multiple times due to pressure from banks, and even the American Bankers Association acknowledges it’s better than previous drafts. However, banks continue to oppose it because it still allows a specific feature they strongly object to.

Currently, companies that issue stablecoins aren’t allowed to directly pay out returns to users. This rule remains the same as in the previous GENIUS Act. The new agreement adds a restriction for exchanges and other crypto businesses: they can’t offer rewards that work like interest on a bank account.

However, the current rules allow platforms to reward users simply for being part of their loyalty programs, potentially based on how long they’ve been members, their account balances, or how much they’ve used the platform. Banks are trying to get this specific allowance changed.

This could work by crypto exchanges creating membership programs with different levels. The more a user interacts with the platform – especially by holding stablecoins – the higher their membership tier and the better the rewards. These rewards, potentially calculated based on their average stablecoin balance over time, could be given in stablecoins or other digital tokens. While not technically the same as earning interest on a bank deposit, the result for the user would feel similar.

Banks see this setup as a way to get around the rules. In a letter to senators, the American Bankers Association (ABA) called a specific part of the proposal a “significant loophole” that would allow exchanges to offer rewards that are very similar to interest, but through slightly different legal means. The ABA argues that if the purpose of the GENIUS Act was to prevent stablecoins from competing with traditional bank deposits, this new language actually defeats that purpose by simply allowing the competition to happen in a different way.

The cryptocurrency industry argues that rewards for active participation aren’t the same as earning yield, and they encourage genuine user interaction. They believe exchanges should be free to create appealing user experiences. This compromise achieves a balance by prohibiting the most straightforward way to earn yield on stablecoins, while still allowing exchanges to compete based on how well they engage users.

The truth likely falls somewhere in the middle of these two viewpoints. While rewards based on activity do offer some compensation for lost yield, it’s unclear if they’re enough to prevent the deposit withdrawals banks are predicting. The current compromise suggests things won’t be bad enough to cause major problems. However, banks continue to push for stricter rules, believing these withdrawals will eventually happen and become too costly to fix.

What this fight tells you about CLARITY’s real politics

The competition for higher returns on stablecoins highlights a larger political trend within CLARITY that isn’t being discussed much in the news.

While many are calling this bill a win for the crypto industry, the truth is it’s the result of a lot of negotiation and compromise. Different groups had to give a little to get the bill passed. Banks successfully pushed for a ban on direct stablecoin yields, while the crypto industry secured an exception for rewards programs. Progressive Democrats achieved some, though not all, of their desired ethics rules. The administration included language preventing a central bank digital currency that could be used for surveillance, and the CFTC gained more authority over digital commodities. The SEC continues to oversee digital securities.

The final bill wasn’t a complete victory for the crypto industry; it was a compromise reached through negotiations between many powerful groups. Banks weren’t the only ones who had to give ground – the crypto industry also made significant concessions. Ultimately, the bill reflects what all parties could agree on, not what any one of them initially desired.

It’s common for big financial laws to be the result of many different groups making compromises. The Dodd-Frank Act of 2010 and changes to the Bank Secrecy Act followed a similar pattern. Lawmaking often involves finding the smallest set of compromises needed to get a bill passed.

What makes the CLARITY bill unusual is that banks are publicly asking for more changes even after the initial committee work is done. This is a risky move for them. If they push too aggressively, Democrats might abandon the bipartisan agreement, and the bill could fail in the Senate. However, if they succeed in getting further restrictions added, they risk losing support from the crypto industry and facing pressure from their own voters, potentially leading Republican senators to oppose a bill that doesn’t deliver on its original promises.

Banks believe they can use their influence to get more favorable terms from the legislation without causing it to fail. However, the crypto industry thinks the banks have already pushed too hard. One of these sides is bound to be wrong.

The realistic outcome

Given the current political situation, there are a few different ways the rules for stablecoin yields could end up in the final version of the CLARITY Act.

One possibility is that the current agreement remains largely the same. This agreement was reached after months of discussion, and both senators involved believe it’s complete. If the Senate votes on it in June or July 2026, as planned by the White House, it’s likely to pass with only small, technical changes. This is the result the cryptocurrency industry is hoping for, but banks are working to avoid.

Another possibility is that the language of the bill could be changed during debate on the Senate floor. Democrats, who need to secure bipartisan support to pass the bill, might ask for stricter limits on rewards programs as part of a deal. The American Bankers Association’s efforts are intended to create this situation. If banks can persuade Democrats that the current loophole is too broad, the bill could be amended to further restrict these rewards.

Another possibility is that the language regarding stablecoin yields could be completely removed when the Senate and House versions of the crypto bill are combined. The House already passed its version of the bill (called FIT21) in 2024, and the final version, known as the CLARITY Act, will need to resolve the differences between the two. These negotiations are often unpredictable, and the stablecoin yield rules could change significantly during this process.

Another potential outcome is that the CLARITY bill could stall or completely fail. If disagreements over stablecoin yields become too strong, or if concerns about ethical issues and law enforcement aren’t addressed, the bill might not be signed by the White House on July 4th as hoped, and could even be delayed past the 2026 midterm elections. Senator Lummis cautioned that not passing the committee by Memorial Day could mean the next opportunity to pass the bill wouldn’t come until after November 2026. While the bill did pass the committee on May 14th, there’s still significant pressure to move forward quickly.

Another possibility, often overlooked, is that the proposed law is passed largely as written, but the agencies responsible for putting it into practice significantly limit how rewards are structured. The CLARITY Act would require the SEC and CFTC to create joint rules for stablecoin products. During the rule-making process, which is expected to last until 2027 or 2028, regulators could interpret the law more restrictively than its actual wording allows. This is the outcome banks might secretly favor if they fail to achieve their desired changes during the legislative process.

What this tells you about banks and crypto going forward

The debate over yields in the CLARITY Act regarding stablecoins is a sign of things to come – a bigger competition between traditional banks and the cryptocurrency industry that will likely continue for years.

The key advantage of crypto-based services like stablecoins and decentralized exchanges is their ability to offer better deals to customers than traditional banks, all while still remaining profitable. This isn’t because of the technology itself, but because crypto companies don’t have the same expensive, outdated systems and regulatory burdens as banks, allowing them to share more of the value with their users.

Banks are facing a critical decision: evolve their businesses to compete with new, crypto-focused companies, or maintain the regulations that currently protect them from competition. The current debate around the CLARITY Act is just one example of this challenge. Similar issues will arise with future developments like central bank digital currencies, digital versions of deposits, smart money systems, and decentralized lending platforms – all of which boil down to the same core question of how banks will adapt.

Banks, as seen in the ABA’s CLARITY campaign, generally prefer to limit competition from cryptocurrency through lobbying and regulation instead of embracing it. This approach has been effective in the past – banks have used similar tactics to control rivals like money market funds and peer-to-peer lending for years. However, it remains to be seen if this strategy will continue to work as crypto gains wider acceptance and political influence.

The cryptocurrency industry believes the best path forward is to secure clear regulations through legislation, allowing them to then compete fairly in a regulated market. The CLARITY Act, as it currently stands, would provide crypto companies with a much more defined legal landscape than they’ve ever had in the U.S. If passed in its current form, this bill would give the crypto industry a significant advantage, allowing them to compete with traditional banks on a more equal playing field.

Over the next few months, it will become clear whether banks can further restrict the language around crypto regulations, or if the crypto industry can maintain the current agreement. The Senate vote will be the first sign of which way things are going, but the level of lobbying from the American Bankers Association in the coming weeks will be the best indicator of the likely outcome.

If you’re following the debate, here are three key things to look for. First, will Senators Tillis or Alsobrooks reconsider the current agreement due to pressure from banks? Second, will studies from the American Bankers Association about potential deposit outflows influence moderate Democrats and change how they vote? And third, will crypto industry groups – like the Blockchain Association, Digital Chamber, and Coinbase – effectively rally their supporters to counter the banking industry’s influence?

The bottom line

While the CLARITY Act is expected to pass in 2026, its chances aren’t as strong as some reports suggest. The biggest challenge isn’t coming from regulators like the SEC or CFTC, opposition from Democrats concerned about ethics, or even objections to government oversight of cryptocurrency. Instead, the American Bankers Association and other banking groups are actively working to prevent a provision in the current compromise – led by Senators Tillis and Alsobrooks – that would allow stablecoins to earn yield.

Let’s be real, this whole thing isn’t about protecting customers or the financial system like the banks are saying. It’s about them trying to protect their old way of making money – profiting off of basically free money from our deposits. If people start moving their money to better options – and honestly, it makes sense why they would – the banks are acting like that’s a disaster. They *are* right that it could affect their lending, but the bigger question is, should banks have a monopoly on lending in the US? I think that’s what’s *really* being debated here.

As an analyst, I see the CLARITY Act as a carefully negotiated deal. It gives banks some significant wins – notably removing the restrictions on direct stablecoin yields that were in the GENIUS Act – but it doesn’t shut the door on innovation. The law still allows for competition through rewards systems tied to stablecoin activity. While neither side is completely happy with it, it strikes a pretty reasonable balance, which is typical for major financial legislation.

The future of this legislation depends on who takes the bigger risk. If banks demand more changes and Democrats abandon the current agreement, the bill could fail in the Senate and not become law by 2026. However, if the cryptocurrency industry resists major changes and the bill passes as written, banks could face a significant competitive disadvantage they haven’t seen in a long time.

Both outcomes are plausible. Neither is guaranteed.

For our readers, the key takeaway is to closely follow how lawmakers vote, how different versions of the bill are combined, and the rules agencies create afterward. The final law will establish the basic structure, but how well it actually works will depend on how those rules are implemented. Expect continued influence from the banking industry throughout this entire process, even after the bill is passed.

Banks aren’t against CLARITY because they dislike crypto rules in general. They’re specifically trying to stop this version of CLARITY because it allows stablecoins to offer returns that banks can’t easily compete with without increasing interest rates on traditional savings accounts. At its core, this is a battle over the profits made from the difference between offering zero-interest deposits and investing in Treasury securities.

The answer to that question will shape American banking for the next decade.

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2026-05-25 15:49