Written by: Adam Willems, Wired Magazine

Translated by: Saoirse, Foresight News

United States President Donald Trump showcases the signed bill during the signing ceremony of the "GENIUS Act" at the White House. Photo: Francis Chung; Image Source: Getty Images

On July 18, after more than a decade of regulatory uncertainty for the U.S. cryptocurrency industry, American lawmakers finally brought parts of the industry under a regulatory framework. The newly signed "U.S. Stablecoin Innovation and Establishment Act" (referred to as the "GENIUS Act") imposes a series of requirements on stablecoin issuers: stablecoins are cryptocurrencies that claim to be pegged to a more stable asset, and their issuers must provide 100% full reserves for the tokens in cash or short-term government bonds, accept audits, comply with anti-money laundering rules, and more. Additionally, to position stablecoins as "digital cash" rather than "fund storage tools," the act prohibits stablecoin issuers from paying interest.

However, the key point is that the act does not prohibit cryptocurrency exchanges from providing rewards for users' stablecoin holdings—this means that stablecoin holders can still receive economic incentives that are highly similar to "interest." Currently, if Coinbase users hold a stablecoin called USDC on the platform, they can earn an annual yield of up to 4.1%, a return level comparable to that of high-yield savings accounts.

U.S. banking groups believe this provision constitutes a significant regulatory loophole that could encourage people to move their funds from banks to cryptocurrency exchanges, which are subject to much looser regulations. Some exchanges offer rewards that even exceed those of high-yield savings accounts (the latter typically have annual yields around 4.25%, with specific rates varying by institution). For example, the exchange Kraken promotes its "USDC holding reward annual rate of up to 5.5%."

Even without considering the reward mechanism, stablecoins still pose potential risks to consumers compared to bank deposits and cash. Unlike checking or savings accounts, cryptocurrencies are not protected by Federal Deposit Insurance Corporation (FDIC) insurance—this means that if a stablecoin issuer goes bankrupt, the U.S. government will not directly intervene to compensate consumers for their losses.

Some regulatory agencies and cryptocurrency supporters believe that the strict reserve requirements and bankruptcy protection clauses in the "GENIUS Act" are sufficient to replace FDIC insurance. However, stablecoins have previously experienced collapses, and a research report from the Bank for International Settlements (BIS) indicates that even for "least volatile" stablecoins regulated by the "GENIUS Act," their trading prices "rarely maintain the claimed pegged value level." BIS researchers point out that this phenomenon raises questions about "the ability of stablecoins to serve as reliable payment tools."

Research from the Federal Reserve Bank of Kansas City suggests that rising demand for stablecoins could have a ripple effect on the economy. The bank's assistant vice president, Stefan Jacewitz, stated, "If users purchase stablecoins with bank deposits, the funds available for banks to lend will inevitably decrease." He also noted that incentives like rewards "could lead to an acceleration and expansion of fund flows beyond normal market levels."

In April of this year, a report released by the U.S. Treasury indicated that, influenced by the "GENIUS Act," consumers could transfer up to $6.6 trillion from bank deposits to stablecoins. Research from the American Bankers Association (ABA) pointed out that if this occurs, the funds available for banks to lend will decrease, potentially increasing borrowing costs for consumers and businesses in the long term.

The Game Behind the Compromise

The advancement of the "GENIUS Act" took four years to finalize, during which most members of the U.S. Congress agreed on the principle that "stablecoin issuers should not pay interest." "The drafters of the bill understood that stablecoins are a special tool—they are digital cash, digital dollars, not securities that generate returns," said Corey Then, global policy deputy general counsel at Circle.

In March of this year, Coinbase CEO Brian Armstrong spoke out on this issue. He stated on the X platform (formerly Twitter) that users should be allowed to earn interest on stablecoins, comparing this model to "ordinary savings accounts, without the cumbersome disclosure obligations and tax implications required by securities regulations."

Ron Hammond, who previously served as a senior lobbyist for the well-known cryptocurrency industry group Blockchain Association, revealed details of the subsequent negotiations: ultimately, banking groups agreed to a deal that included their long-standing demand to "prohibit stablecoin issuers from paying interest," but this clause still left room for cryptocurrency exchanges—allowing them to provide monetary incentives for users' stablecoin holdings. Hammond noted that some cryptocurrency companies initially hoped the bill would explicitly allow "interest," but mainstream cryptocurrency groups ultimately agreed to this compromise.

"At least the cryptocurrency industry successfully pushed for the inclusion of relevant language in the bill, opening the door for them to provide 'returns' or 'return-like' rewards," said former House Financial Services Committee Chairman McHenry, who now serves as vice chairman of the blockchain project Ondo.

Some experts in the cryptocurrency industry are dissatisfied with the banking groups' current "alarmist attitude." Cody Carbone, CEO of the cryptocurrency advocacy and lobbying group Digital Chamber, stated, "Raising concerns about stablecoin reward mechanisms at this stage is neither sincere nor reflective of the in-depth discussions that shaped the 'GENIUS Act.' Banking representatives participated throughout the legislative process, negotiating with stakeholders in the cryptocurrency space, and the final allowance for exchanges and affiliated platforms to provide stablecoin-related rewards is a direct result of those discussions."

A Second Opportunity for Negotiation

The cryptocurrency industry's willingness to compromise is partly due to its reluctance to expend too much political capital on this "experimental bill"—the industry views the "GENIUS Act" as a "litmus test" for broader regulatory legislation in the cryptocurrency space. Hammond explained, "The concern at the time for the cryptocurrency industry was: 'If even a relatively simple bill like the stablecoin act encounters obstacles, then our chances of passing it will significantly decrease, and the likelihood of passing market structure legislation in the next two years will be almost zero.'"

The "market structure legislation" Hammond refers to is the "CLARITY Act." This act aims to establish a regulatory framework for products and financial platforms on blockchain, similar to the regulatory rules currently applicable to traditional financial entities such as stock markets, banks, and institutional investors. The "CLARITY Act" has passed the House of Representatives, and a Senate version is expected to be introduced in September of this year. Just days after the signing of the "GENIUS Act," the drafters of the Senate "CLARITY Act" released a request for comments, posing a key question: should legislation restrict or prohibit mechanisms like stablecoin rewards?

The "CLARITY Act" provides a second opportunity for negotiation between the cryptocurrency industry and the banking sector—both sides can use this to push for the implementation of provisions not included in the "GENIUS Act." Paul Merski, executive vice president of congressional relations for the American Independent Community Bankers Association (ICBA), stated that the association will oppose any provisions that "contradict the core principle of 'prohibiting interest payments.'" He called this principle a key element established by the "GENIUS Act." "We have addressed this issue in stablecoin-related legislation, and we will ensure that relevant provisions are also included in the market structure legislation to avoid regulatory loopholes."

"The problem is that the pace of advancement for the two pieces of legislation is different: the losing side in the last round of negotiations will come back, while the winning side will need to defend the terms they have already secured," McHenry pointed out. "Now we are entering the second round of negotiations, and all the issues from the last round will need to be re-discussed, significantly increasing the difficulty of the second round."

During the advancement of the "CLARITY Act," the U.S. banking industry is also publicly positioning itself in the stablecoin space. Citigroup and Bank of America have hinted at the possibility of issuing their own stablecoins; meanwhile, PNC Bank and JPMorgan have established partnerships with Coinbase. For example, JPMorgan's partnership plan will allow customers to link their bank accounts directly to cryptocurrency wallets as early as next year.

JPMorgan is also piloting a "deposit token" system: this system uses technology similar to stablecoins but does not require the asset reserves to back the token's value at a 1:1 ratio as mandated by the "GENIUS Act." Ultimately, if the "CLARITY Act" leads to a ban on stablecoin "reward" mechanisms, the banking industry may regain the upper hand in this multi-trillion-dollar game of deposits and interest rates.

"The banking groups clearly miscalculated in the negotiations surrounding the 'GENIUS Act,' a mistake that is extremely rare for them," McHenry stated. "Now they have returned with a strong stance—the risks in this game are very high."

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