‘A million different ways to skin the cat’: Why stablecoin backers see incentives as inevitable under Clarity Act

Following months of debate on what should be allowed for stablecoin rewards under the Clarity Act and a growing push from banks to restrict it further, efforts to stop crypto firms like Coinbase from rewarding users for holding and using digital dollars may in the end prove futile.

"If it's not rewards for holding balances, it's going to be rewards in some other way, shape, or form," Kevin Lehtiniitty, CEO of Borderless.xyz told The Block. "It's going to be for activity that you do on the platform, it's going to be signup bonuses. There's a million different ways to skin the cat."

"There's no way that Clarity ends up passing in such a way where it can feasibly block all the thousands of different ways that people are going to engineer the financial products around us," Lehtiniitty added.

The Clarity Act cleared the House but has stalled in the Senate, where debate over stablecoin rewards has emerged as a key sticking point, according to GSR Chief Legal and Strategy Officer Joshua Riezman. The issue intensified after stablecoin growth accelerated and the passage of the GENIUS Act last year.

While the latest draft of Clarity prohibits issuers from paying yield simply for holding stablecoins, lawmakers this week filed more than 100 amendments, including proposals to tighten enforcement against rewards programs that could encourage users to park larger balances in digital dollars.

The proposed amendment to the bill's language around stablecoins came after last week, when a group of powerful banking advocates, including the American Bankers Association and Bank Policy Institute, sent a letter to Sen. Tim Scott and Sen. Elizabeth Warren, urging the lawmakers to make changes to the legislation.

"We are aligned with the distinction the proposal is trying to draw–that certain payment stablecoin transactions and activities will be allowed to generate rewards … while interest-like payments on stablecoin balances or other stores of value will be prohibited," the organizations said in the letter. "We are concerned, however, that the proposed language includes exceptions that will enable evasion of the intended prohibition and incentivize customers to hold and grow stablecoin balances at the expense of deposits."

The banking lobby's principal complaint regarding platforms rewarding users for holding stablecoins is the notion that allowing crypto exchanges to do so could cause the siphoning off of bank deposits. Such a deposit flight, they argue, could hinder their ability to lend money, which then would in turn disrupt the U.S. economy.

Deposit flight argument overstated

In the past, both in the U.S. and abroad, platforms like Coinbase, Kraken, and Binance have sought to reward users for keeping more money on their exchanges in the form of stablecoins. Pegged to the U.S. dollar and backed by liquid assets such as Treasurys, stablecoins are generally considered less volatile than cryptocurrencies such as Bitcoin (BTC).

"You've had this concept of high-yield accounts from fintechs for years… and that hasn’t necessarily caused a complete collapse of the U.S. banking system,” said Lehtiniitty. "So why would stablecoins paying yield magically cause the collapse of the U.S. banking system?"

"No matter how many times or ways they try to plug the holes of the rewards getting to the users, they're going to get to the users because there's always going to be entrepreneurs trying to figure out that system to give the value to the consumers," Collins told The Block. "Because that's how they get more consumers on their platform."

The debate comes as Wall Street firms and analysts increasingly project that the stablecoin market could grow into the trillions of dollars. Currently, the two major issuers are Tether, with its (USDT) token, and U.S.-based Circle with its (USDC) token. Tether, which is seeking a foothold in the American market, has issued a stablecoin designed to comply with the GENIUS Act.

Stablecoin adoption story evolving

Many traditional financial institutions and payment companies are investing in or exploring stablecoins, in addition to other forms of programmable money utilizing blockchain technology. Wall Street financial giants that form part of this group include JPMorgan, Citigroup, and BlackRock. Major payment networks Visa and Mastercard are both involved in stablecoins. Bank of America's CEO once said the bank would likely issue its own stablecoin.

As William Blair analysts put it in a research note from earlier this year: "The stablecoin genie is out of the bottle."

"The fact that stablecoins themselves have become the major crypto use case is really interesting," Nic Puckrin, an analyst and co-founder of Coin Bureau, told The Block. "[They're] now being integrated into payments everywhere from Stripe to all these other merchants and banks; massive TradFi firms are now trying to get a piece of the pie in the stablecoin space."

Western Union (founded in the 1800s) and MoneyGram (whose roots stretch back decades) have both become involved in stablecoins as they see using the blockchain-based payment rails as a way to increase efficiency and reduce costs across their global remittance networks.

MoneyGram CEO Anthony Soohoo said stablecoins are increasingly being treated similarly to fiat, with some countries assigning the same value to USDC as they would U.S. dollars. If that trend continues, then financial institutions could eventually treat stablecoin deposits similarly to cash deposits, and paying yield for holding the fiat-pegged tokens may no longer be controversial.

"If you really can treat it like a real currency, should you be able to use it and earn yield on it? And then regulations and laws will evolve over time," Soohoo told The Block. "The story hasn't been completely written yet."