Section 404

The stablecoin market has exploded, with issuers like Circle (USDC) and others holding billions in U.S. Treasuries and generating real yields in a high-interest-rate environment. Yield-bearing (or “yield-enhanced”) Stablecoins allow holders to earn 3-5%+ returns simply by holding the asset, often passively.

For banks, this represents a major competitive threat, and that’s why they are fighting the new law, the clarity Act, that supports these instruments. Bank deposits are a primary funding source for lending (loans, mortgages, etc.). If customers shift cash into stablecoins offering competitive yields (backed by safe Treasuries), banks could see significant outflows. This reduces their deposit base, limits lending capacity, and pressures net interest margins.Perhaps the most crucial point, is that Banks operate under strict rules (capital requirements, deposit insurance via FDIC, oversight by the Fed/OCC), while stablecoin issuers can offer yield-like returns with potentially lower overhead and different risk profiles. Banks argue this creates an uneven playing field and could destabilize the traditional banking system. Last, but not least, large-scale shifts to stablecoins might impact bank liquidity, credit availability, and even monetary policy transmission. Banking trade groups (ABA, ICBA, etc.) have lobbied aggressively, warning of loopholes that could let crypto platforms effectively pay “interest” disguised as rewards. As we move into the final stages of the Clarity Act, section 404 is the key one; The compromise language prohibits crypto firms from paying “any form of interest or yield” to customers solely for holding a payment stablecoin. It bans anything “economically or functionally equivalent” to bank deposit interest. Rewards tied to on-chain activity (e.g., staking, market making, transaction volume, or platform usage) may still be allowed, but not passive balance-based yields that mimic bank accounts. As the CLARITY Act moves forward, expect continued debate. Will it fully protect banks, or will crypto find workarounds? since the Trump administration is supporting crypto publicly, banks may not have the winning hand, and that could impact their earnings and consequently, their stock prices.

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