Congress had been on its Easter break, but that hasn’t paused the squabbling over the Senate Banking Committee’s CLARITY Act. The Easter Bunny failed to put crypto market structure rules in U.S. stakeholders’ baskets, and hopes are fading that this lame rabbit will ever hop across the legislative finish line. CLARITY fight opens new front as U.S. lawmen express opposition. The digital asset market structure legislation’s forward progress has been stalled for nearly three months now, ever since the Coinbase exchange threw a hissy fit over the Act’s plans to limit stablecoin ‘rewards.’
The GENIUS Act prohibits stablecoin issuers from offering ‘yield’ (aka interest) to token holders. Efforts to achieve a mutually acceptable compromise on the yield/reward issue have gone nowhere. White House stablecoin report pleases some, annoys others. For weeks now, crypto operators have been begging the White House to release internal data that reportedly showed the faulty logic behind the banks’ concerns that stablecoin rewards will lead to mass deposit flight and the subsequent impairment of banks’ lending capacity.
This week, the White House’s Council of Economic Advisers (CEA) obliged, publishing the ‘Effects of Stablecoin Yield Prohibition on Bank Lending’ on the White House website. The report claims that banning crypto platforms from offering stablecoin rewards would increase bank lending by only $2.1 billion, representing a mere 0.02% of total loans currently being issued. Community banks have been particularly vocal regarding the threat that stablecoins pose to their lending capacity, but the CEA claims these smaller banks would see loans rise by only $500 million, representing 0.026% of their current total, should a ban be imposed. The report claims this worst-case scenario would require a number of “implausible” actions to occur, including a sixfold rise in the current stablecoin market cap.
However, it should be noted that Treasury’s Bessent suggested last summer that the overall stablecoin market could reach $3.7 trillion by the end of this decade, representing a more than tenfold increase from its current cap. The report nonetheless concludes that “a yield prohibition would do very little to protect bank lending, while forgoing the consumer benefits of competitive returns on stablecoin holdings.” TD Cowen analysts suggested that the CEA report was unlikely to remove “the political obstacles” preventing CLARITY’s forward progress. “As long as small banks view stablecoins as a threat to their future they will oppose crypto legislation unless it contains an explicit ban on stablecoin yield.”
Regardless (and predictably), Coinbase’s C-suite is praising the report, with chief legal officer Paul Grewal calling its authors “the most respected economists in the government” while claiming “we now know why stablecoin rewards critics wanted it suppressed.” Small banking stakeholders that previously expressed alarm over the rewards issue, including the American Banking Association’s Community Bankers Council and the Independent Community Bankers of America, have yet to publicly respond to the CEA report. Perhaps this stablecoin medicine is going down more easily thanks to the spoonful of sugar that Treasury’s Financial Crimes Enforcement Network (FinCEN) provided to the entire banking sector this week. FinCEN wants to “fundamentally reform” (read: reduce) financial institutions’ anti-money laundering (AML) and countering the financing of terrorism (CFT) programs under the Bank Secrecy Act (BSA). FinCEN and the Treasury’s Office of Foreign Assets Control (OFAC) also announced a proposal on how to implement the GENIUS Act’s AML/CFT requirements. The 303-page proposal calls for stablecoin issuers to report sketchy stuff like they were actual financial institutions with actual compliance teams. The proposal offers “a potential FinCEN enforcement and supervision policy” that issuers could adopt, after which FinCEN and other agencies “generally would not take major supervisory action, unless the issuer has a significant or systemic failure to maintain that program.” FinCEN also wants issuers to comply with “any lawful order” to “block, freeze, and reject specific or impermissible transactions.” The new rules would also apply to stablecoin-based sanctions evasion.
Last week also saw the Federal Deposit Insurance Corporation (FDIC) issue its proposals for implementing GENIUS. The FDIC proposes that “deposits held as reserves for a payment stablecoin would be insured to the stablecoin issuer under the FDIC’s coverage rules for corporate deposits, but would not be insured to payment stablecoin holders on a pass-through basis.” The FDIC also wants issuers to redeem stablecoins “no later than two business days” following the redemption request being made. However, it’s seeking public input on whether that timeline should be shortened. The FDIC is accepting comments on its overall plan for the next 60 days.
In January, similar concerns about CLARITY’s DeFi language were voiced by the Senate Judiciary Committee, which felt that the successful prosecutions of DeFi devs like Tornado Cash co-founder Roman Storm would have been difficult if not impossible had such language been law at the time Storm was charged. The NSA warned that CLARITY’s DeFi language “risks creating gaps in oversight and reducing access to critical information that federal, state, and local law enforcement rely on in financial crime investigations.” The NDAA warned that CLARITY would “materially limit prosecutors’ ability to pursue financial crime cases involving the movement of funds outside established regulatory frameworks.” Not for nothing, but only around one-quarter of D.C. lobbyists currently believe CLARITY will head to Trump’s desk for signing into law this year, while two-thirds believe there’ll be no action on this front until 2027. Prediction market bettors are more optimistic, with Polymarket showing (as of mid-Thursday) a 59% chance of CLARITY being signed into law this year, while bettors at rival Kalshi are slightly more bullish at 63%. TD Cowen analysts suggested that the CEA report was unlikely to remove “the political obstacles” preventing CLARITY’s forward progress. “As long as small banks view stablecoins as a threat to their future they will oppose crypto legislation unless it contains an explicit ban on stablecoin yield.” At the Digital Assets and Emerging Technology Policy Summit, Hagerty claimed that “we’re very close, and my expectation is that we get it into committee in this next work period that starts on Monday” and later acknowledged that “there are several issues still outstanding,” including “quorum,” “ethics,” and protections for DeFi developers. The NSA warned that CLARITY’s DeFi language could hinder law enforcement oversight and access to information. The NDAA warned that CLARITY would materially limit prosecutors’ ability to pursue certain financial crime cases. The escalation of DeFi language concerns was reinforced by a Politico report that several U.S. law enforcement groups had written letters opposing plans to limit devs’ legal liability.
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