Bank trade groups ask Senate to strip stablecoin rewards

Six major U.S. banking trade groups sent a letter to the Senate Banking Committee on May 8 asking lawmakers to remove all language on stablecoin rewards, including Section 404, from the CLARITY Act ahead of a scheduled markup on May 14.

The letter was signed by the American Bankers Association, Bank Policy Institute, Consumer Bankers Association, Financial Services Forum, Independent Community Bankers of America and National Bankers Association. It targets Section 404, the provision that would set limits on how crypto platforms can reward users for holding stablecoins, and says the current wording contains loopholes that would allow rewards tied to account balances, account tenure and holding duration.

Senators Thom Tillis and Angela Alsobrooks negotiated compromise text that bans passive yield on stablecoins while allowing activity-based rewards tied to platform use. Coinbase CEO Brian Armstrong posted “mark it up” on X after the compromise language was released. Some large financial firms, including Goldman Sachs, BNY and Morgan Stanley, have indicated support for the bill; retail banking trade groups oppose the current stablecoin language.

In the May 8 letter the trade groups asked that the phrase “economically or functionally equivalent” be replaced with “substantially similar.” They said that change would broaden the definition of prohibited incentives and capture a wider range of reward structures tied to holding stablecoins.

The White House Council of Economic Advisers estimated that a full ban on stablecoin yield would raise aggregate bank lending by about $2.1 billion, roughly 0.02% of current lending, and increase community bank lending by about $500 million, or 0.026%. The CEA also estimated a net welfare cost of about $800 million for an outright ban and said a large lending increase would require an unlikely extreme scenario.

Bank officials noted that U.S. banks fund roughly 80% of lending with customer deposits and that deposits are a key source of low-cost funding. They warned that rewards that keep dollars in crypto wallets could reduce deposit balances. Crypto platforms counter that activity-based rewards are meant to encourage actual use of their networks rather than serve as interest substitutes.

The Senate Banking Committee will decide during the May 14 markup whether to keep, remove or tighten the stablecoin rewards provisions. The final language of Section 404 will affect how stablecoins can be used and whether they can function as an alternative distribution layer for dollar-denominated value outside traditional banks.