The competition for stablecoin yields, how has it stalled U.S. cryptocurrency regulatory legislation?

Written by: Oluwapelumi Adejumo

Translated by: Saoirse, Foresight News

The legislation, supported by the president and aimed at establishing more comprehensive regulatory rules for the U.S. cryptocurrency market, is approaching a political deadline at the congressional level. Meanwhile, the banking industry is pressuring lawmakers and regulators to prohibit stablecoin companies from offering yields similar to bank deposit interest.

This contest has become one of the most critical unresolved issues in Washington's crypto agenda. The focal point of the controversy is whether stablecoins pegged to the U.S. dollar should focus on payment and settlement functions or can also incorporate wealth management attributes that compete with bank accounts and money market funds.

The Senate's market structure bill, known as the "CLARITY Act," has stalled due to a breakdown in negotiations surrounding the so-called "stablecoin yield."

Industry insiders and lobbyists indicate that if the bill is to have a realistic chance of passing before the election year schedule tightens, late April to early May will be the practical window for advancing the bill.

Congressional Research Service Sharpens Legal Controversy

The Congressional Research Service's definition of this issue is narrower than the public debate suggests.

In a report dated March 6, the Congressional Research Service noted that the "GENIUS Act" prohibits stablecoin issuers from directly paying yields to users, but it does not fully clarify the legality of what it calls the "third-party model"—where intermediaries like exchanges are positioned between issuers and end users.

The Congressional Research Service stated that the bill does not clearly define "holders," leaving room for debate over whether intermediaries can still pass on economic benefits to customers. This ambiguity is precisely why the banking industry hopes Congress will clarify it in a broader market structure bill.

The banking industry believes that even limited yield incentives could make stablecoins strong competitors to bank deposits, particularly impacting regional and community banks.

However, crypto companies argue that incentives tied to payments, wallet usage, or network activity can help digital dollars compete with traditional payment channels and are expected to enhance their status in mainstream finance.

This divergence also reflects differing perceptions of the future development positioning of stablecoins.

The infographic shows that as the use of digital dollars expands, there are significant disagreements between banks and crypto companies on the question of "who should benefit from stablecoin yields."

If lawmakers primarily view stablecoins as payment tools, then the rationale for imposing stricter limits on related rewards becomes more compelling. Conversely, if lawmakers see them as part of a significant transformation in the way value circulates on digital platforms, then the argument for supporting limited incentives becomes more tenable.

The banking industry has urged lawmakers to close what they call "regulatory loopholes" before such reward mechanisms become more widespread. Banks argue that allowing idle balances to earn rewards would lead depositors to move their funds out of banks, thereby weakening the core funding source for banks to lend to households and businesses.

Standard Chartered Bank estimated in January that by the end of 2028, stablecoins could withdraw about $500 billion in deposits from the U.S. banking system, with small and medium-sized banks bearing the brunt of the pressure.

The infographic compares why banks and cryptocurrencies are concerned about the stablecoin bill, showcasing deposit outflows, impacts on lenders, cash-back rewards, and banking protectionism.

The banking industry is also trying to demonstrate to lawmakers that its position has public support. The American Bankers Association recently released a poll result:

• When asked about "if allowing stablecoin yields could lead to a reduction in funds available for banks to lend, affecting communities and economic growth," respondents supported Congress prohibiting stablecoin yields by a ratio of 3:1;
• By a ratio of 6:1, they believe that legislation related to stablecoins should be cautious to avoid disrupting the existing financial system, especially community banks.

But the crypto industry counters that the banking sector merely wants to protect its funding model by restricting competition from digital dollars.

Industry figures, including Coinbase CEO Brian Armstrong, argue that under the "GENIUS Act," the reserve requirements for stablecoin issuers are stricter than those for banks—issued stablecoins must be fully backed by cash or cash equivalents.

Rising Trading Volume Elevates Stakes in Washington Contest

The market size has made this yield dispute impossible to view as a niche issue.

Boston Consulting Group estimates that the total circulation of stablecoins last year was about $62 trillion, and after excluding activities like bot trading and internal exchange circulation, the real economic activity was only about $4.2 trillion.

The vast gap between apparent trading volume and actual economic use also explains why the "yield" dispute has become so critical.

If stablecoins primarily remain tools for trading and market structure settlement, lawmakers can more easily limit them to payment tools; however, if the yield mechanism turns stablecoins into widely used cash storage tools in user apps, the pressure on banks will quickly escalate.

To this end, the White House attempted to broker a compromise earlier this year: allowing partial yields for a few scenarios like peer-to-peer payments, but prohibiting returns on idle funds. Crypto companies accepted this framework, but the banking industry rejected it, leading to a complete stalemate in Senate negotiations.

Even if Congress does not act, regulators may tighten yield models.

The Office of the Comptroller of the Currency proposed in a rule implementing the "GENIUS Act" that if stablecoin issuers provide funding to affiliates or third parties, which then pay yields to stablecoin holders, it would be deemed a disguised provision of prohibited yields.

This means that if Congress cannot legislate a framework, the executive branch may delineate at least part of the rules through regulatory measures.

Time is Running Out for Congress

Currently, the contest is divided into two lines:

• Congress debates whether to resolve the issue through codified law;
• Regulators are defining the boundaries of corporate behavior within the existing legal framework.

For the Senate bill, time itself is the greatest pressure.

Alex Thorn, head of research at Galaxy Digital, wrote on social media:

If the "CLARITY Act" cannot pass committee review by the end of April, the probability of passing in 2026 will be extremely low. The bill must be presented for a full Senate vote in early May. Legislative time is running out, and with each passing day, the probability of passage decreases by one point.

He also reminded that even if the yield dispute is resolved, the bill's breakthrough remains uncertain:

Currently, it is believed that the stablecoin yield dispute is blocking the "CLARITY Act." However, even if a compromise is reached on the yield issue, the bill is still likely to face other obstacles.

These obstacles may include decentralized finance regulation, regulatory authority, and even ethical issues.

Before the midterm elections in November, crypto regulation is likely to become a larger political battleground. This makes the current stalemate more urgent—if the bill is delayed, it will face a more crowded political agenda and a more challenging legislative environment.

Prediction markets also reflect a shift in sentiment. At the beginning of January, Polymarket estimated the probability of the bill passing at about 80%; after recent setbacks (including Armstrong stating the current version is unworkable), the probability has dropped to nearly 50%.

Kalshi data shows that the probability of the bill passing before May is only 7%, and the probability of passing by the end of the year is 65%.

The Failure of the Bill Will Hand More Decision-Making Power to Regulators and the Market

The impact of failure goes far beyond the yield dispute. The core purpose of the "CLARITY Act" is to define whether crypto tokens belong to securities, commodities, or other categories, providing a clear legal framework for market regulation.

Once the bill stalls, the entire industry will rely more on regulatory guidance, temporary rules, and future political changes.

This is also one of the reasons why the market is highly focused on the fate of the bill. Matt Hougan, chief investment officer at Bitwise, stated earlier this year that the "CLARITY Act" would codify the current favorable regulatory environment for crypto; otherwise, future governments might reverse existing policies.

He wrote that if the bill fails, the crypto industry will enter a period of "proving itself," needing three years to demonstrate its indispensability to the general public and traditional finance.

Under this logic, the industry's future growth will rely less on the expectation of "legislative implementation" and more on whether products like stablecoins and asset tokenization can truly achieve large-scale implementation.

This presents the market with two distinctly different paths:

• Bill passes → Investors price in the growth of stablecoins and tokenization in advance;
• Bill fails → Future growth relies more on actual adoption while facing uncertainty from shifting Washington policies.

The flowchart illustrates the countdown for Senate stablecoin decision-making, with deadlines on March 6 and late April or early May leading to two paths: if Congress acts, it will bring regulatory clarity and faster growth; if Congress fails to act, uncertainty will arise.

At this stage, the next decision-making power lies in Washington. If senators can restart this market structure bill this spring, they can personally define the extent to which stablecoins can pass value to users and the scope of the crypto regulatory framework that can be codified into law. If not, regulators are clearly prepared to delineate at least part of the rules themselves.

Regardless of the outcome, this debate has long transcended the question of "whether stablecoins belong to the financial system," delving deeper into how stablecoins will operate within the system and who will benefit from their development.