Stablecoin Yield Showdown: Crypto Group Fires Back at Bankers With Compromise Proposal for CLARITY Act

The Digital Chamber, a leading blockchain trade association, has released a counter-proposal to break the deadlock over stablecoin yields that is holding up the Senate’s CLARITY Act.

Responding to bankers’ demands for a total ban on stablecoin rewards, the crypto group signaled willingness to abandon interest-like payments for static holdings but insisted on preserving rewards tied to transactions, liquidity provision, and ecosystem participation. With the White House demanding a compromise by month’s end and the midterm election window rapidly closing, this proposal could represent the industry’s last best chance to salvage comprehensive crypto market structure legislation.

The Stablecoin Yield Battle That Ground Crypto Legislation to a Halt

If you’ve been following the CLARITY Act’s journey through Congress, you know it should have been straightforward. The bill establishes clear rules for digital asset regulation, defines SEC versus CFTC jurisdiction, and provides the regulatory certainty the crypto industry has begged for since 2017.

Instead, it’s become ground zero for a turf war between Wall Street and Silicon Valley over something that sounds deceptively simple: whether you can earn rewards on stablecoins.

The battle escalated this week when another White House meeting between banking executives and crypto leaders ended without resolution . The bankers, representing an industry that views stablecoin yields as an existential threat, held their line: no stablecoin yield or reward is acceptable in any form. They circulated a one-page document titled “Yield and Interest Prohibition Principles” making their position crystal clear .

“The banking side took a hard line, arguing that any form of stablecoin yield or reward is unacceptable, stating that such yields would threaten the core of the U.S. banking system—the deposit business,” according to sources familiar with the meeting .

Enter the Digital Chamber. On Friday, the blockchain trade association began circulating its own set of principles, offering what its CEO Cody Carbone describes as a genuine compromise . The document defends provisions in the Senate Banking Committee’s draft bill that outline acceptable reward scenarios while signaling that the industry is willing to give ground on the most controversial elements.

The Bankers’ Case: Why Wall Street Fears Stablecoin Yields

The $500 Billion Question

To understand why bankers are digging in, you need to understand the numbers at stake. Standard Chartered Bank recently published analysis projecting that U.S. banks could lose more than $500 billion in deposits to stablecoins by the end of 2028 .

Geoff Kendrick, global head of digital assets research at Standard Chartered, estimates that bank deposits will drop by roughly one-third of stablecoin market capitalization . With stablecoin supply already topping $300 billion and growing about 40% annually, that’s not pocket change .

The mechanism is straightforward. When customers hold stablecoins on platforms like Coinbase and earn 3.5% rewards on USDC balances, that money isn’t sitting in traditional bank accounts . It’s not funding small business loans, mortgages, or local community projects. From the banking perspective, it’s leaking out of the system entirely.

Regional Banks Feel the Heat Most

The exposure isn’t evenly distributed. Kendrick’s analysis identifies regional banks as the most vulnerable . Huntington Bancshares, M&T Bank, Truist Financial, and Citizens Financial Group top his list of institutions most at risk .

Why regional banks? Because they’re more reliant on lending as a core business. Investment banks have diversified revenue streams—trading, advisory, asset management. Regional banks make money by taking deposits and making loans. If deposits flee, their business model breaks.

The Independent Community Bankers of America (ICBA) has quantified the threat even more aggressively. Their analysis warns that allowing crypto exchanges to continue paying stablecoin rewards could reduce community bank lending by $850 billion due to a $1.3 trillion reduction in industry deposits .

The Fed Weighs In

The Federal Reserve has taken notice. A research paper from Fed Principal Economist Jessie Wang warns that as retail deposits substitute into stablecoins, banks face more concentrated, uninsured, wholesale deposits, increasing both liquidity risk and funding costs .

Wang’s analysis suggests that smaller institutions may face more serious headwinds, particularly in markets where relationship banking has been central to local credit provision . The implication is clear: stablecoin growth could accelerate banking industry consolidation, with community banks bearing the brunt.

The “Parallel Banking System” Fear

Bank of America CEO Brian Moynihan has sounded the alarm that if Congress approves yield-bearing stablecoins, up to $6 trillion in bank deposits—roughly 30-35% of all U.S. commercial bank deposits—could flow to stablecoin markets .

That’s the nightmare scenario for bankers: an unregulated parallel banking system that offers similar returns without the compliance burdens, capital requirements, and deposit insurance costs that traditional banks shoulder.

The Crypto Counter-Argument: Why Rewards Matter

The GENIUS Act Framework

The crypto industry isn’t starting from scratch. Last year’s GENIUS Act established the current legal framework for stablecoins, and it already includes a prohibition on issuers paying interest “solely” for holding tokens .

But here’s the crucial distinction: the GENIUS Act didn’t ban exchanges and intermediaries from offering rewards on stablecoin balances. That’s the loophole bankers want closed, and it’s exactly what crypto firms are fighting to preserve .

Coinbase currently offers 3.5% rewards on some USDC balances, generating an estimated $1.3 billion in annual stablecoin revenue . For context, Coinbase reported $247 million in Q4 revenue from stablecoins alone, plus another $154.8 million from blockchain rewards. The stakes are existential.

The Innovation Argument

Circle CEO Jeremy Allaire pushed back against banking industry concerns at the World Economic Forum in Davos, arguing that stablecoins don’t threaten financial stability .

Allaire points out that government money market funds have coexisted with traditional banks for decades, offering similar yields without destabilizing the system. The same logic, he argues, should apply to stablecoin rewards .

Coinbase CEO Brian Armstrong has been more confrontational. “The bank lobbying groups and bank associations are out there trying to ban their competition,” Armstrong said at Davos. “I have zero tolerance for that, I think it’s un-American and it harms consumers” .

DeFi Can’t Function Without Rewards

The Digital Chamber’s principles document emphasizes that two specific reward scenarios are particularly important for decentralized finance: rewards tied to providing liquidity and rewards that foster ecosystem participation .

These aren’t just marketing gimmicks. In DeFi, liquidity providers earn rewards for depositing assets into protocols that facilitate trading. Those rewards are the entire economic engine of decentralized exchanges and lending platforms. Eliminating them would cripple the ecosystem.

The Digital Chamber’s Compromise: What’s on the Table

The Concession: Static Holdings

Cody Carbone, CEO of the Digital Chamber, wants policymakers to understand one thing: this is a genuine compromise .

“We want to make the case known for policymakers that we do think this is a compromise,” Carbone said in an interview Friday .

The key concession is straightforward. The crypto industry is willing to give up any rewards that look like interest payments for static holdings of stablecoins—the type of product that most closely resembles a bank savings account .

That’s not nothing. Carbone points out that the GENIUS Act represents current law, and the industry’s willingness to forgo holding rewards is a significant concession . If bankers do nothing and continue demanding a blanket prohibition, the status quo—which includes rewards—remains unchanged.

The Red Lines: Transaction Rewards, Liquidity Provision, Ecosystem Participation

What the industry won’t give up are rewards tied to specific activities. The Digital Chamber’s principles document highlights two particular scenarios it wants protected:

Liquidity Provision Rewards: When users deposit stablecoins into DeFi protocols to facilitate trading, they earn rewards. These aren’t passive interest payments—they’re compensation for providing a service that makes markets function.

Ecosystem Participation Rewards: When users engage with applications, complete transactions, or participate in governance, they may earn rewards. These incentives drive adoption and network effects.

The draft bill’s Section 404 already outlines acceptable reward scenarios, and the Digital Chamber argues these provisions are especially important for DeFi .

The Study Offer

The bankers proposed a two-year study on stablecoins’ effect on bank deposits. The Digital Chamber says that’s acceptable—with one crucial condition.

Carbone emphasized that the crypto group can accept the study as long as it doesn’t come with an automatic regulatory rulemaking requirement . In other words, study all you want, but don’t pre-commit to banning rewards based on what the study might find.

“If they don’t negotiate, then the status quo is that just rewards continue as-is,” Carbone warned. “If they do nothing and they simply demand a blanket ban, this matter will not end” .

The White House Weighs In: “Use a Scalpel, Not a Sledgehammer”

Patrick Witt’s Balancing Act

Patrick Witt, executive director of the President’s Council of Advisors for Digital Assets, has been the administration’s point person on breaking the stalemate. In a Friday interview with Yahoo Finance, Witt made the case for compromise .

“It’s unfortunate that this has become such a big issue,” Witt said, noting that the CLARITY Act isn’t really about stablecoins—that was the GENIUS Act’s domain. “Let’s use a scalpel here to address this narrow issue of idle yield” .

Witt warned that the window for passing the CLARITY Act is “rapidly closing” as the political calendar turns toward the midterm elections . The White House has called for a compromise by the end of this month .

The “Scalpel” Approach

Witt’s “scalpel” framing is instructive. The administration isn’t taking sides on whether stablecoin yields are good or bad. It’s arguing that this narrow issue shouldn’t derail comprehensive market structure legislation that the entire industry has awaited for years.

“Bankers should return to the table to talk again,” Carbone said, echoing Witt’s call for continued negotiations . If the banking side doesn’t negotiate, the status quo persists, and the bill remains stalled.

Witt also pushed back on the notion that stablecoin rewards threaten banks. “Banks can also offer stablecoin products to their customers just like crypto companies can,” Witt told Yahoo Finance. “This doesn’t create an unfair advantage for either side. Many banks are currently applying for OCC banking charters to begin offering products similar to banks” .

The Clock Is Ticking: Why Time Matters

The Midterm Election Threat

The urgency isn’t manufactured. Treasury Secretary Scott Bessent warned that if Democrats win the House in November—a scenario he called “far from my base case”—the “prospects of getting a deal done will just fall apart” .

Ray Dalio made a similar prediction in January: “President Trump has two years of unobstructed governance, but this could be significantly weakened in the 2026 midterm elections and reversed in the 2028 election.”

The Senate Agriculture Committee has already passed its version of the CLARITY Act, which focuses on the commodities side. The Banking Committee’s version deals more with securities. If the Banking panel follows its Agriculture counterpart, it could advance the bill along partisan lines. But to pass the full Senate, the bill needs 60 votes—meaning Democratic support is essential.

The March 1 Deadline

The White House has reportedly called for a compromise by the end of this month . With negotiations at an impasse and the banking side seemingly unwilling to budge in repeated meetings, that deadline looks increasingly ambitious.

Witt indicated that another meeting may be scheduled for next week . Whether that produces a breakthrough—or simply more documentation of the divide—remains to be seen.

The Bigger Picture: What’s at Stake for Crypto

Regulatory Certainty vs. Continued Uncertainty

The CLARITY Act isn’t just about stablecoin yields. It’s the most comprehensive attempt yet to create a federal framework for digital assets, defining when tokens are securities versus commodities, establishing SEC and CFTC jurisdiction, and providing rules of the road for exchanges, custodians, and DeFi protocols.

If the bill dies over stablecoin rewards, the industry remains in regulatory limbo—dependent on shifting enforcement priorities and agency guidance rather than clear statutory law. That uncertainty has real costs: institutional capital stays on the sidelines, innovation migrates offshore, and investors face continued regulatory risk.

The Coinbase Factor

Coinbase’s role in this drama can’t be overstated. The exchange pulled its support for the bill in January, with CEO Brian Armstrong declaring, “We’d rather have no bill than a bad bill.” That decision transformed what should have been a routine markup into an industry-wide crisis.

The specific objections from Coinbase extended beyond stablecoin yields to include concerns about tokenized stocks restrictions, DeFi provisions, and privacy protections. But stablecoin rewards became the rallying point—the issue that crystallized the broader industry frustration with what some saw as bank-friendly legislation.

The Institutional Adoption Trajectory

Beyond the immediate legislative fight, this dispute reflects a deeper tension about crypto’s future. Is it meant to coexist with traditional finance, or to displace it? Should crypto products complement bank offerings, or compete directly for deposits?

The bankers’ position suggests they view stablecoin rewards as a zero-sum threat. The crypto industry’s position suggests they view them as legitimate innovation that expands consumer choice. The truth probably lies somewhere in between—but Congress needs to pick a lane.

What Happens Next: Three Scenarios

Scenario One: Compromise Reached (Best Case)

The banking side accepts the Digital Chamber’s olive branch. Static holding rewards are prohibited, but transaction-based rewards, liquidity incentives, and ecosystem participation programs survive. The bill advances out of committee with bipartisan support and reaches President Trump’s desk by spring.

Bitcoin rallies on regulatory clarity, institutional capital floods in, and the U.S. cement its position as the global crypto capital. Polymarket odds of passage surge past 80%.

Scenario Two: Stalemate Continues (Base Case)

Bankers hold firm on total prohibition. Crypto firms refuse to accept a blanket ban. The White House convenes more meetings, but March 1 passes without resolution. The bill languishes as the midterm campaign season consumes congressional attention.

After November, if Republicans hold the House, negotiations resume. If Democrats flip it, the bill dies. The industry operates under existing law—the GENIUS Act for stablecoins, and regulatory guidance for everything else.

Scenario Three: Banking Side Wins (Worst Case)

Democrats win the House and possibly the Senate. The legislative window closes. The next Congress, under divided government or unified Democratic control, takes a different approach to crypto regulation—potentially reversing much of the Trump administration’s work.

Crypto advocates warn this would be an “extinction event” for U.S. crypto innovation. Companies move offshore. The U.S. cedes its leadership position to friendlier jurisdictions.

The Bottom Line: Why This Fight Matters for Investors

For crypto investors watching the legislative drama unfold, the stakes couldn’t be clearer. The CLARITY Act represents the best chance in years to establish rules of the road that everyone can operate under—exchanges, custodians, DeFi protocols, and institutional investors alike.

The stablecoin yield dispute is narrow in scope but profound in implication. It’s about whether crypto can offer products that look and feel like bank accounts, or whether those products must remain distinct—tied to activity, not passivity.

The Digital Chamber’s proposal offers a middle path: no passive savings accounts, but active participation rewarded. Whether the banking industry accepts that compromise, or continues pushing for total prohibition, will determine whether comprehensive crypto legislation passes in 2026 or joins the long list of “almost but not quite” efforts.

For now, the ball is in the bankers’ court. The White House wants a deal by March 1. The crypto industry has shown its cards. If the banking side doesn’t return to the table, as Carbone put it, “the status quo is that just rewards continue as-is” .

And the status quo, for crypto investors, means continued uncertainty—and continued volatility.