Main Street Could Get Hosed If Swamp Compromise On Stablecoin Comes To Fruition

Senators Thom Tillis and Angela Alsobrooks released their long-awaited compromise on stablecoin yield last week.

The deal, embedded in Section 404 of the Digital Asset Market Clarity Act, bars stablecoin firms from paying yield that is “economically or functionally equivalent” to interest on a bank deposit. That sounds firm on paper.

In practice, it is riddled with gaps large enough to drive a trillion-dollar industry through.

This will have an enormous real-world impact. Despite the original intent of the GENIUS Act, cryptocurrency companies are currently marketing incentive structures as “rewards,” “cash back,” or similar benefits that are economically indistinguishable from interest when they are conditioned on holding stablecoin balances. As long as the prohibition on yield is limited to direct payments from issuers, platforms, exchanges, wallets and affiliated intermediaries will engineer structures to deliver the same economic return through different corporate architecture.

The Tillis-Alsobrooks text gives them the legal vocabulary to keep doing it.

The compromise bans stablecoin issuers from offering yield based on simply holding stablecoin reserves. But the word “solely” in the text is doing enormous work.

The moment a company attaches any secondary activity to a stablecoin holding, it can sidestep the prohibition entirely. Complete simple activities like watching a video, completing one transaction, or clicking a governance button and suddenly the yield calculation tied to your balance becomes a “reward” for participation.

The drafters may have intended a meaningful distinction. Crypto lawyers will exploit it as a canyon.

The “economic or functional equivalence” standard has its own problem: it is undefined and unenforceable until regulators decide what it means. The compromise directs federal regulators to draft a stablecoin disclosure framework and publish a list of permissible reward activities. That list is explicitly non-exhaustive, which means regulators can expand it at will, and the courts will spend years sorting out what Congress intended.

Meanwhile, rewards tied to staking, governance, or “validation” activity can be scaled directly to balance size and holding duration, functioning as yield in every meaningful economic sense while wearing a different label.

The enforcement mechanisms in the current text make matters even worse. The standard for prosecution requires proving that a firm “knowingly and willfully” structured a rewards program to evade the prohibition. That is a far higher bar than the consumer protection standards that govern ordinary financial institutions under existing law.

And the rulemaking empowering regulators to prevent evasion uses the word “may,” not “shall.” Congress may never get rules at all, and penalties may not kick in until rules that may never come are finally written.

The communities that will pay the price are not Wall Street. The Independent Community Bankers of America has projected $1.3 trillion in displaced deposits and $850 billion in reduced lending capacity unless Congress acts to close the loophole.

Community banks fund small businesses, family farms and local home buyers. They do not have access to wholesale funding markets that can replace a sudden outflow of deposits. Deposit flight from banking institutions into stablecoin holdings could shrink credit creation and lending by 25%, a direct hit to the affordability and access of consumer credit for small businesses, farms and families.

Former Trump Acting White House Council of Economic Advisers Chairman Tomas Philipson put it plainly in RealClearMarkets: credit competition should occur on a level playing field, not where incumbents are regulated while new competition is not.

Stablecoin exchanges cannot lend or invest in securities, so they cannot generate real returns from their reserves. When they offer yield anyway, they are doing something structurally unsound, competing for deposits without the obligations that make deposit-taking safe.

Unlike banks, stablecoin issuers provide no FDIC insurance protections, are not subjected to stress testing or rigorous supervision examination and cannot rehypothecate those assets into lendable securities.

The prohibition on interest-bearing stablecoins is foundational to making sure crypto market structure legislation creates a sustainable financial system. The Tillis-Alsobrooks compromise, as currently written, preserves that principle in name while honoring it in nothing. Crypto industry attorneys are already calculating how to restructure reward programs to fit within the gaps.

The Senate Banking Committee should not mark this up until those gaps are closed. And if they are not, Congress should not pass it into law.

Andrew Langer is President of the Institute for Liberty.

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.