As should have been expected by all, a research report published by the Trump administration’s Council of Economic Advisors (CEA) indicates that stablecoin yield will not impact lending at all.
The FUD promoted by banks never held any merit but it was a great display of the power of lobbying and money on the legislative process. Elected officials are too easily swayed by fear mongering and PAC money. Unfortunately this has delayed the CLARITY Act, the crypto market infrastructure bill, that will help to propel the US financial industry to greater dominance.
As the White House notes, the GENIUS Act, the law that approved payment stablecoins, prohibits stablecoin issuers from offering interest or yield to holders. but does not stop third-party arrangements that might offer interest-bearing products. As the technology exists to automate this process, in effect yield should be part of the stablecoin equation except for the rogue banks that fear competition.
Challenging the banks pyrrhic argument, the Council of Economic Advisors report states:
“In short, a yield prohibition would do very little to protect bank lending, while forgoing the consumer benefits of competitive returns on stablecoin holdings.”
The Report concludes:
“The yield prohibition in the GENIUS Act—and its proposed reinforcement through the CLARITY Act—maybe motivated by the concern that competitive stablecoin returns will draw deposits out of the banking system and contract lending. Our model shows that this concern is quantitatively small. Most stablecoin reserves recirculate through the banking system as ordinary deposits: only the 12% held in bank accounts is truly locked out of the credit multiplier (if banks apply a 100% reserve requirement), and even that fraction is further attenuated by prudential reserve requirements and voluntary bank liquidity buffers. At baseline calibration, eliminating stablecoin yield increases bank lending by $2.1 billion, which represents a net increase of 0.02% of total loans. Producing lending effects in the hundreds of billions requires simultaneously assuming the stablecoin share sextuples, all reserves shift into segregated deposits, and the Federal Reserve abandons its ample-reserves framework. It takes similarly implausible assumptions for the welfare effect of yield prohibition to turn positive.”
If stablecoin yield is blocked by traditional banks, it will undermine the development of the entire financial services sector. The CLARITY Act aims to provide rules for all crypto industry participants including banks which are already moving into the stablecoin sector.
Meanwhile, some crypto firms are seeking bank charters. Some will inevitably offer deposit backed loans.
These lines will continue to blur and the best option for bank incumbents is to accept change and adapt. History shows that laggards who fail to recognize the inevitable tend to whither and die.
At the same time, a dollar based stablecoin that generates yield will help to boost the greenback as the world’s reserve currency propelling global demand. Once again, this is good for everyone, including banks.
You cannot forget the fact that US consumers and businesses will win as well. These are the constituents that policymakers should be focussing on. Unfortunately, some are not and these Senators or Representatives should be tossed out of Congress as they cannot understand the obvious.
Stablecoin yield along with the broader digital asset ecosystem can fuel the financial industry in the US to new heights and dominance. As finance is one of the most important industries in the US, all policymakers should support these innovations.
Let’s hope that the Senate Banking Committee where the CLARITY Act remains mired in inane debate moves forward now. Even once signed into law, complete enactment will take time so it is better to get started now.
The White House report, the Effects of Stablecoin Yield Prohibition on Bank Lending, is available below.