The Public Ledger: Trump Backs Crypto on CLARITY

Hello, Fintech Friends!

In a post to his Truth social network last Tuesday—March 3—President Trump strongly backed the crypto industry in their ongoing battle with banks over a key provision in a Senate draft of the CLARITY Act.

To fully appreciate the ongoing dispute between the banks and crypto industry, it is necessary to consider the origin of the issue—the GENIUS Act, which was signed into law last summer. The GENIUS Act establishes rules for payment stablecoins, including a mandate for one-to-one backing with high-quality liquid assets. The legislation also prohibits stablecoin issuers from offering interest or rewards on balances. However, the Act does not preclude third parties, such as exchanges or platforms, from providing compensation to stablecoin holders, a major point of contention for banks.

As an example, Coinbase, a crypto exchange and custodian, pays rewards on USDC—a stablecoin issued by Circle—held on its platform. Similarly, PayPal offers rewards on PayPal USD—a stablecoin issued by Paxos—held in either a PayPal or Venmo digital wallet.

Banks claim offering compensation to stablecoin holders risks significant deposit flight. While this scenario would negatively impact banks, by either reducing deposits or forcing them to pay higher rates to keep them, banks argue they lend out their deposits, boosting economic growth. In contrast, stablecoin issuers must keep their deposits in assets like U.S. treasuries, providing no economic benefit—according to banks—other than driving down the cost of borrowing for the U.S. government by increasing demand for treasuries.

Banks are pushing to ban compensation for stablecoin holders in the CLARITY Act, which addresses digital asset regulation. A section of the Senate’s draft—404—does just that (it does, however, allow activity-based rewards and incentives). The crypto industry is strongly opposing this effort.

Compensation for holders is an important vehicle to drive widespread adoption of stablecoins, a prerequisite for penetrating consumer payments, the holy grail of use cases. Right now, stablecoins are in search of a problem that does not exist for consumer payments in markets like the U.S.

Paying with a credit or debit card is simple, secure, and, in most cases, lucrative for consumers, as the interchange model allows for generous rewards. Compensating stablecoin holders puts this model at risk, creating high stakes for the ongoing battle.

Despite the president’s backing, the legislative outcome is far from certain. With midterm elections approaching and the Iran conflict potentially crowding out other issues, it’s anyone’s guess how this ends. Stay tuned!

Bob Hammel
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