We need banking services; we just don’t necessarily need banks.
The advent of digital assets and the potential for disintermediation pose both threats and opportunities for traditional banks. Stablecoins may upend traditional financial rails, and the GENIUS Act provided a federal path for firms to issue digital dollars.
Yet, the newly minted law bans issuers from paying interest or yield on stablecoins to holders, as stablecoins are defined as means of value transfer rather than investments.
While it may seem to make little sense, as stablecoin issuers hold funds in assets like US Treasuries, generating returns that could be shared with stablecoin holders, banks are terrified by this possibility. Hence, the language in the bill that saves the traditional banking model: holding money in accounts that generate little to no interest while lending it out at rates considerably higher. This is not to mention the fees that old banks love to add and, at times, hide.
Digital asset firms would love to compete with old banks and are looking at workarounds under the guise of “rewards,” something banks are lobbying against.
Recently, it was revealed that China will allow holders of its central bank digital currency (CBDC), the digital yuan, to earn interest. This should encourage adoption.
Some in the crypto-sphere, like Coinbase CEO and founder Brian Armstrong, claim that this characteristic gives China a competitive advantage and boosts their ambition to become a global reserve currency. On X, Armstrong stated:
“China has decided to pay interest on their own stablecoin, because it benefits ordinary people, and they recognize it as a competitive advantage. I worry we are missing the forest through the trees in the U.S. Rewards on stablecoins will not change lending one bit – but it does have a big impact on whether U.S. stablecoins are competitive. Rewards (or even paying interest) benefits ordinary people just like community lending does. We have to let the market do both.”
Coinbase Chief of Policy Faryar Shirzad adds that the US banking lobby is poised to give the US adversary a significant advantage.
“China understands the opportunity the bank lobby is poised to give them and announces that they will pay interest to users of the Digital Yuan. Undermining the supremacy of the USD has been a longstanding goal of the PRC – the Senate banning rewards would be a big assist to China’s effort.”
There are some differences between the digital yuan and regulated “payment” stablecoins in the US. The digital yuan will be used to monitor and influence (control) its users, while the digital dollar will guard against privacy concerns. This fact alone makes the digital dollar a more powerful tool.
Yet, for holders around the world to earn interest while holding regulated dollar-based stablecoins, this would benefit both stablecoin issuers and US policymakers who want to buttress the fortress dollar. It may also help boost US Treasury purchases, another positive for the US.
So what is the solution?
Banks should probably get on board and embrace interest-bearing stablecoins. If you can’t beat them, join them. Creating a moat to protect a legacy business that is in decline harms consumers and, in this case, may undermine US interests. In the long run, Banks may end up harming themselves if they do not hop on the digital asset train, which is leaving the station. This is another great example of an innovator’s dilemma. Live today to die tomorrow? Or man up and adapt.
It will be interesting to see how this shakes out on Capitol Hill. Money talks inside the beltway, and banks have a lot.