FUD, or fear, uncertainty, and doubt, can effectively influence individuals’ hearts and minds. The unknown can lead to risk, and the possibility of something bad happening, even when the probability is low, can drive decisions. FUD is what the banking industry has leveraged to strip stablecoin holders of their ability to earn yield.
The thesis was that if people hold stablecoins, they will not hold cash in savings or other bank cash deposits, and banks will not be able to originate loans for businesses and consumers. CI has long pointed out a simple solution for the banking sector to prevent this: It’s something called competition. If large and small banks offered a better return on cash holdings, people would be less inclined to move their money.
As well, there is the glaring fact that banks can issue their own stablecoins and compete head-to-head on a level playing field. Some banks are already issuing stablecoins and, at some point, tokenized deposits will become the norm.
Unfortunately, the banks won the yield argument as outlined in the CLARITY Act and swayed enough politicians who were either dim and believed it, or simply feared a drop in political donations.
Yesterday, there was an ongoing discussion on X that banks have used a similar argument previously when the banking industry decided that Money Markets were the source of future calamity.
Omid Malekan, a professor at Columbia School of Business, shared a letter from the archives that the Independent Bankers Association of America (a predecessor to the ICBA) presented at a 1980 Senate hearing. The letter from the banking industry predicted that Money Market funds were a threat to deposits, more so for smaller banks, and that allowing this innovation would lead to great harm. Of course, this never occurred, and banks did not experience any flight from deposits. Money Markets grew to trillions.
While allowing stablecoin yield is good for consumers and businesses, mostly smaller ones, the politics around the decision to block yield are not only counterintuitive but also reflective of flaws in our elected officials; some have few skills beyond speaking with alacrity, even when they are profoundly wrong.