Prominent banking industry associations have expressed that a recently proposed amendment to crypto market structure legislation, intended to resolve a significant legislative obstacle, “falls short” of its intended objectives. This sentiment follows the finalization of a compromise by Senators Thom Tillis (R-N.C.) and Angela Alsobrooks (D-Md.) aimed at resolving a prolonged dispute involving the White House, the banking lobby, and the cryptocurrency sector.
Key Takeaways
- Major banking trade groups have stated that a revised provision in proposed crypto legislation, addressing stablecoin remuneration, is inadequate.
- This development occurs shortly after Senators Tillis and Alsobrooks reached a compromise designed to end a protracted disagreement involving key stakeholders.
- The compromise seeks to prevent stablecoin issuers from offering interest-like rewards to U.S. customers, a move designed to mitigate potential deposit flight from traditional banks.
- Banking groups argue that the current language still permits loopholes that could undermine the intended prohibition, while Senator Tillis maintains the compromise addresses core concerns.
The legislative language in question prohibits “covered parties” from providing any form of interest or yield to U.S. customers solely for holding stablecoins, or engaging in activities functionally equivalent to interest-bearing bank deposits. However, the prohibition excludes “activity-based or transaction-based rewards and incentives” linked to genuine commercial activities.
In a joint statement, the American Bankers Association, Bank Policy Institute, Consumer Bankers Association, Financial Services Forum, and Independent Community Bankers of America argued that while the senators’ intent to prohibit yield on stablecoins is correct, the proposed text is insufficient. They emphasized the critical importance of Congress enacting precise legislation on this matter.
For the past year, banking organizations have voiced opposition to provisions in proposed stablecoin legislation that, while restricting direct interest payments by issuers, may still allow platforms to offer rewards. Their primary concern is that such incentives could draw deposits away from traditional banks, particularly smaller community institutions. Conversely, cryptocurrency firms contend that limitations on rewards would stifle innovation within the sector.
This issue has repeatedly stalled efforts to advance broader cryptocurrency market structure legislation, especially after the House of Representatives passed the Clarity for Responsible Financial Innovation Act. A planned Senate Banking Committee hearing in July was postponed at the last minute when cryptocurrency exchange Coinbase withdrew its support, partly due to the stablecoin reward language. The exchange has since approved the latest iteration of the text.
A comprehensive cryptocurrency bill would establish federal regulations for the industry, primarily by delineating oversight responsibilities between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
Potential Regulatory Precedent and Ongoing Challenges
The proposed legislation faces further hurdles, including provisions related to cryptocurrency-driven conflicts of interest and concerns surrounding illicit finance. Additionally, limited time on the Senate floor presents a significant challenge to its advancement.
The banking groups specifically highlighted concerns regarding potential circumvention of the rules through membership organizations and the allowance of rewards calculated based on factors like duration and balance. They contend that incentivizing the holding of stablecoins for extended periods and in specific amounts could undermine the legislation’s goal of preventing deposit outflows, by directly linking rewards to the amount and duration of stablecoin holdings on exchanges or in wallets.
The banking trade groups have indicated their intention to continue engaging with lawmakers. They plan to submit detailed proposals to strengthen the legislative language and reiterated their commitment to working collaboratively to foster innovation while safeguarding community-based deposits essential for local lending and economic activity.
Senator Tillis responded by stating that he and Senator Alsobrooks collaborated with all stakeholders, including the banking industry, over several months. He described the outcome as a “substantially improved, consensus-based product” that prohibits stablecoin rewards from mimicking bank deposit interest, addressing the core concern of deposit flight. Tillis believes the compromise provides a bipartisan path forward for crypto market structure legislation.
The result is a substantially improved, consensus-based product. Our compromise prohibits stablecoin rewards from resembling interest on bank deposits, our core concern over deposit flight. Some in the banking industry may not want either of these things to happen, and we respectfully agree to disagree.
Senator Thom Tillis (R-N.C.)
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