CLARITY Act, the Battle Between Banks and Yields

Article by: Kolten, Aave Labs

Compiled by: Golden Finance

The CLARITY Act has sparked a debate about the future direction of the US monetary and banking sectors. One core provision will prohibit digital asset service providers (such as cryptocurrency exchanges) from paying yields solely because customers hold “payment stablecoins.”

This proposed ban on third-party platforms follows the 2025 GENIUS Act, which already prohibits stablecoin issuers from paying interest. The banking industry supports these measures, aiming to protect their profits, which are a lucrative part of their business models.

In simple terms, the banking model is: accepting customer deposits and paying lower interest, then lending these deposits at higher rates to others or investing in assets like government bonds. The net interest margin, or spread, is the difference between the interest earned and the interest paid.

This model can be highly profitable. JPMorgan reported a record net profit of $58.5 billion in 2024. Revenue reached $180.6 billion, with net interest income of $92.6 billion, which is its main source.

New fintech solutions offer depositors a more direct way to earn higher yields, while also introducing competition that the industry has traditionally avoided. Some large traditional banks use regulatory measures to protect their business models, which is not surprising, as such strategies are reasonable and have precedents.

Dual-Model Banking

By early 2026, the average annual interest rate on savings accounts nationwide was 0.47%. Meanwhile, the largest US banks, including JPMorgan and Bank of America, offered a standard APY of 0.01% on basic savings accounts. During the same period, the yield on risk-free investments, such as 3-month US Treasury bonds, was about 3.6%. Therefore, a large bank can accept customer deposits, buy government bonds, and earn a spread of over 3.5% with minimal risk.

JPMorgan holds approximately $2.4 trillion in deposits, which theoretically could generate over $85 billion in income solely from the deposit spread. Although this is a simplified estimate, the logic remains valid.

Since the global financial crisis, the banking industry has split into two distinct types: low-interest-rate banks and high-interest-rate banks. Low-interest-rate banks are large traditional banks that leverage their extensive branch networks and brand recognition to attract deposits from less rate-sensitive customers.

High-yield banks, such as Goldman Sachs’ Marcus or Ally Bank, typically operate online and compete on deposit rates closer to market levels. Research by Kundu, Muir, and Zhang shows that the difference between the 75th and 25th percentile deposit rates among the top 25 banks expanded from 0.70% in 2006 to over 3.5% today.

The profitability of low-interest-rate banks depends on their reliance on a customer base that is not actively seeking higher yields.

“$6 Trillion in Deposit Outflows”

The banking industry argues that allowing stablecoins to generate yields could lead to deposit outflows totaling up to $6.6 trillion. They claim this would cause a credit crunch in the economy. Bank of America CEO Brian Moynihan expressed this concern at an investor conference in January 2026, warning: “Deposits are not just pipelines; they are funds. If deposits leave banks, lending capacity shrinks, and banks may have to rely more on wholesale funding, which increases costs.”

He added that while US banks themselves might be unaffected, small and medium-sized enterprises would feel the impact first. This argument views stablecoin inflows as a departure from the traditional banking system. However, this is not always the case.

When customers purchase stablecoins, dollars are transferred to the stablecoin issuer, who holds them as reserves. For example, the main stablecoin USDC issued by Circle has reserves managed by BlackRock, consisting of cash and short-term US Treasuries. These assets remain within the traditional financial system, meaning total deposits may not necessarily change, just shift from customer accounts to the issuer’s accounts.

What is the real concern?

The banking industry’s genuine worry is that deposits will flow from low-yield accounts into higher-yield investments. For example, USDC rewards on Coinbase and DeFi products like Aave App offer yields far exceeding most banks. For customers, the choice is between earning 0.01% on $1 in a large bank or over 4% on the same $1 in stablecoins—more than 400 times difference.

This dynamic challenges the low-interest-rate banking model, prompting customers to transfer funds from transactional accounts to interest-bearing accounts, making them more sensitive to rates.

In a world with yield-bearing stablecoins, customers can access market rates without switching primary bank accounts, intensifying existing competition among banks. As fintech analyst Scott Johnson said, “Banks are not really competing with stablecoins for deposits; they are competing with each other. Stablecoins just accelerate this dynamic, ultimately benefiting consumers.”

Research by Kundu, Muir, and Zhang supports this view, finding that when market interest rates rise, deposits tend to flow from low-interest-rate banks to high-interest-rate banks. This capital movement promotes lending to individuals and businesses, with high-interest-rate banks increasing their share of such loans. Yield-bearing stablecoins are likely to replicate this effect, directing funds toward more competitive institutions.

Historical Parallels

The current conflict over stablecoin yields is similar to historical disputes over bank interest rate limits. Regulation Q was enacted during the Great Depression to restrict banks from paying interest on deposits to prevent “excessive competition.” For decades, since market rates remained below the legal ceiling, the regulation had little impact. But in the 1970s, inflation and rising interest rates made these caps binding. Throughout much of the 1960s, the federal funds rate stayed below 5%, but then surged, reaching a peak of 20% in March 1980, at a time when laws prohibited banks from offering competitive rates.

In 1971, Bruce Bent and Henry Brown created the first money market mutual fund, the Reserve Fund, offering market-rate returns and check-writing features. Today, similar structures are abundant. Aave’s functionality is similar, allowing users to earn deposit yields without bank intermediaries. These funds grew from 76 funds with $45 billion in assets in 1979 to 159 funds with over $180 billion in assets within two years, now managing over $8 trillion.

Banks and regulators initially opposed these innovations. These regulations were eventually deemed unfair to depositors, leading Congress to pass legislation in 1980 and 1982 gradually lifting interest rate caps.

Rise of Stablecoins

The stablecoin market has expanded at a similar pace, with total market capitalization rising from just over $4 billion in early 2020 to over $300 billion by 2026. The largest stablecoin, Tether (USDT), is projected to reach a market cap of $186 billion in 2026. This growth indicates strong market demand for freely circulating digital dollars that can potentially offer competitive yields.

The debate over stablecoin yields is a modern version of the money market fund debate. Banks opposing stablecoin yields are mainly those who benefit from the current low-interest-rate system. Their goal is to protect their business models from a technology that could deliver greater value to consumers.

Markets tend to adopt better solutions over time, and regulators’ role is to decide whether to facilitate or delay this transition.