Why Are Banks Blocking Stablecoin Yield with CLARITY Act?

Supporters say it brings order to digital assets. Critics argue it does something else entirely.

It protects the traditional banking system from a new kind of competition. At the center of the debate is a simple question beginners and investors should understand. Who gets to earn yield, and who does not.

Why Yield Threatens the Banking Model

Banks have relied on deposits for decades. They pay savers very little, often around 0.1 percent, and use those deposits to make loans. Stablecoin issuers work differently. They typically hold short term US Treasury bills, which in recent years have yielded about 4.5%. That spread creates a problem for banks. If stablecoins could pass even part of that yield to users, deposits could move fast.

A real world example makes this clear. Money market funds already pay higher yields by holding government debt. In 2023 and 2024, they attracted hundreds of billions of dollars as savers searched for better returns. Stablecoins could offer a similar option, but with faster transfers and global access.

According to a study by the Kansas City Federal Reserve, if stablecoins paid competitive interest rates, US banks could lose about 25.9% of deposits. That would remove roughly 1.5 trillion dollars in lending capacity. Community banks, which rely heavily on deposits to fund local loans, would feel the biggest impact.

What the Clarity Act Actually Does

Instead of competing on rates or technology, banking groups turned to legislation. Section 404 of the CLARITY Act bans yield payments on stablecoins through any method. This includes direct payments from issuers and indirect payments through exchanges, partners, or affiliates. The wording is broad and designed to close every path to sharing yield with users.

Coinbase CEO Brian Armstrong reviewed the 278 page draft closely. After less than two days, he withdrew the company’s support late at night. By morning, the planned markup was postponed. His concern was simple. The bill did not just regulate crypto. It locked in an advantage for banks by law.

This approach follows a familiar pattern. After the 2008 crisis, Dodd Frank reshaped finance in ways that favored large incumbents who could afford compliance. Many in crypto see the CLARITY Act as a digital version of that playbook.

The timing also matters. On December 29, China moved in the opposite direction by allowing its digital yuan to carry interest. While the US debates banning stablecoin yield, Beijing is experimenting with paying it.

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