Wells Fargo CEO says the "Clear Act" may harm the financial system?

Wells Fargo pointed out a real risk, but gave an explanation that was most beneficial to the bank.

Written by: Daii

Imagine a very ordinary action.

You deposit your salary in a regular bank account. The interest rate the bank gives you is close to zero. In turn, it uses this low-cost capital for loans, buying securities, or keeping it as liquid assets.

Now, another account appears on your phone. It contains a stablecoin that can be spent at any time and redeemed for one dollar. The platform also returns part of the treasury bond yield to you. The operational experience is almost indistinguishable from that of internet banking.

Where will the money go? You don’t need a PhD in economics to answer that.

This is the core behind the warning from the CEO of Wells Fargo. The controversy is ostensibly about the "Digital Asset Market Clarity Act," but fundamentally it concerns something older: who is qualified to absorb public cash balances and who can take away the interest margin produced by that money.

The bank claims this relates to financial security. They are not wrong.

But they only told half the story.

The other half is that banks are also defending their cheapest, most stable, and most profitable raw material—retail deposits.

1. First, Clarify the Two Laws

The media's claim that "the Clarity Act allows stablecoins to pay interest" is not precise.

The House version of the Digital Asset Market Clarity Act, H.R. 3633, primarily aims to delineate the jurisdiction of the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission over digital assets, establishing a regulatory framework for the issuance, trading, and intermediation of digital commodities. It is not merely a stablecoin law.

The stablecoin issuance rules primarily come from the GENIUS Act passed in 2025. This law requires that payment stablecoins be fully backed by high liquidity assets, such as cash or short-term U.S. Treasury bonds, and establishes redemption, disclosure, and regulatory requirements. It also prohibits compliant issuers from directly paying interest or returns solely because users hold, use, or redeem stablecoins.

The controversy lies in the borders.

If issuers cannot pay interest, can trading platforms, wallets, or affiliated companies give "rewards"? If rewards are calculated based on balances and holding time, what is the economic difference between them and interest? Follow-up negotiations on legislation concerning market structure attempt to address this boundary. Banks want to expand the ban to exchanges and other service providers. The crypto industry argues that cashbacks, membership rewards, trading incentives, and interest cannot be treated the same.

Thus, what Wells Fargo is truly concerned about is not "Bitcoin suddenly not being under SEC regulation." It worries about a type of platform gaining near deposit-absorbing capability but not bearing the same level of capital, liquidity, deposit insurance, and ongoing prudent regulatory obligations as banks.

This concern is reasonable.

To wrap it up as "as long as stablecoin rewards exist, the financial system will be harmed" is clearly overstated.

2. The Real Risk Is Not High Interest Rates, But Mismatch of Terms and Commitments

Stablecoins do not create systemic risks merely because of high yields.

The risk arises when three conditions occur simultaneously: the public believes it is equivalent to cash; the operator promises it can be redeemed at par value at any time; and the assets supporting this promise cannot be liquidated without loss under stress.

This is a typical run structure.

One hundred people usually do not redeem, making the platform seem unassailable. Once everyone wants dollars simultaneously, the maturity of reserve assets, custody arrangements, settlement speed, and legal jurisdiction will all undergo stress testing. Just a slight delay in redemption can cause market prices to drop below one dollar, triggering panic that further accelerates redemptions.

The Financial Stability Board thus emphasizes that global stablecoins must possess effective stabilization mechanisms, clear redemption rights, comprehensive risk management, and cross-border regulatory arrangements. The Federal Reserve has also pointed out that stablecoins lacking sufficient support and transparency may experience destructive runs, transmitting pressure to the payment system and asset markets.

This is not a story fabricated by banks to scare people.

But it is also not a unique original sin of stablecoins. Money market funds, shadow banks, and banks themselves can all experience runs. The difference lies in the fact that banks typically have deposit insurance, central bank liquidity tools, and a complete set of resolution mechanisms behind them. Whether stablecoin arrangements can achieve similar firewalls depends on legal design, not on whether "coin" is in their name.

3. Deposit Outflows Can Harm Banks, But Do Not Equal Money Disappearing from the Financial System

One of the banks' most commonly used arguments is: once stablecoins provide returns, residents will move their deposits. The bank loses stable funding and can only reduce loans or raise loan rates. Ultimately, the real economy pays the price.

The first half of this reasoning holds true.

Cheap retail deposits are indeed an important source of funding for banks. If a customer from a bank transfers ten thousand dollars to buy stablecoins, that bank may lose ten thousand dollars in deposits. It needs to sell assets, borrow wholesale funds, or raise deposit rates to attract funds back. The rise in marginal funding costs may indeed translate to loan prices.

The pressure on small and medium-sized banks is usually more concerning. Large banks have richer wholesale funding channels, stronger brands, and payment networks. Regional banks, however, are more reliant on local deposits. If funds quickly migrate to a few national platforms, it may not be Wall Street giants that are first squeezed, but banks that provide relationship loans to local small businesses.

However, banks often intentionally skip to the second half.

After customers purchase stablecoins, dollars typically do not just evaporate. Issuers need to use the received dollars to buy short-term treasury bonds, overnight repo assets, or keep cash in custody banks. A more accurate change is that from one bank's retail liabilities, it transforms into a reserve asset of the stablecoin issuer, and then converts into deposits, repo financing, or U.S. government liabilities of another bank.

This is not "the entire system has less money."

This is a change in the liability structure of the financial system.

Such changes can still have serious consequences. Banks lose sticky retail funds, while the stablecoin system obtaining such funds may concentrate assets in the short-term treasury market and a few custody institutions. Normally, this can increase the demand for treasury bonds. In times of stress, it may also lead to highly synchronized redemptions and asset disposals.

Therefore, what truly needs to be studied is the speed of migration, reserve configuration, and the alternative funding costs for banks. You cannot take a shocking "potential total deposit outflow" and just assume it is the already occurred credit contraction. Statistically assuming that every dollar of stablecoin growth permanently eliminates a dollar of bank financing turns balance sheet analysis into propaganda.

4. What Banks Are Most Reluctant to Admit Is That Stablecoins Expose Deposit Interest Margins

Why do banks care so much about "rewards"?

Because the business model of stablecoin issuers is very straightforward. They receive one dollar and hold roughly one dollar's worth of high liquidity reserves. The short-term treasury bonds in the reserves generate yields. If issuers or platforms return part of the earnings to users, customers can see the real opportunity cost of their cash balances.

Traditional banks operate differently. Bank deposits are not a bag of sealed treasury bonds. Banks bear the costs of credit creation, term transformation, payment services, and compliance, as well as capital constraints. Thus, you cannot simply demand that the interest rate on demand deposits equals the treasury bond yield.

But this doesn’t mean that all the interest margins retained by banks are sacred financial stability buffers.

Part of them is the rent derived from the deposit franchise. Customers keep their money in low-interest accounts for a long time due to convenience in payments, inertia, insurance protection, and conversion costs. The weaker the market competition, the less incentive banks have to pass on market rates to depositors.

Stablecoin rewards hit right at this profit margin.

This also explains why "banning all third-party rewards" is not a neutral safety rule. It not only reduces run incentives but also directly stops a product from competing for cash balances with banks. If regulators accept all the banks' claims, it means maintaining low-interest deposits for banks in the name of financial stability.

This is not protecting consumers.

This is protecting the existing cost of liabilities.

The Bank for International Settlements' criticism of stablecoins carries weight: stablecoins rely on sovereign currencies as a pricing basis but may have deficiencies in uniformity, flexibility, and governance. However, this set of criticisms supports strict regulation and public currency anchors without automatically concluding that "platforms must not share reserve earnings with users." Jumping from reserve risks to forbidding earnings lacks a necessary proven causal chain.

5. The Most Dangerous Thing Is Not Rewards, But Disguising Three Products as One Product

What regulators really should prohibit is confusion.

The first type of product is payment stablecoins. They promise stable par value, reserves should be safe, short-dated, isolated, and provide users with clear redemption rights. Their pursuit is payment and should not generate yields through high-risk investments.

The second type is investment products. Users are willing to accept money market, credit, or term risks in exchange for returns. They can exist, but must disclose assets, risks, and the hierarchy of loss-bearing, and cannot masquerade as risk-free cash.

The third type is platform subsidies. Platforms provide cashback from their marketing budgets or rewards based on transactions and consumer behavior. These rewards are not necessarily related to holding balances nor do they necessarily form a financing relationship similar to deposits.

If the law only looks at the term "rewards," it will crudely shove the three types into one pocket.

This would result in two bad outcomes.

On one hand, true interest can be relabeled as points, cashback, or loyalty rewards, bypassing the ban. The rules only constrain the most honest companies.

On the other hand, normal consumer cashbacks and trading incentives may also be mistakenly harmed. Regulation eliminates competition for existing banks without reducing reserve risks.

The correct boundary should consider economic substance: whether rewards accumulate based on balances and time; whether the platform uses funds for financing; whether users are promised stability of principal; whether yields come from safe reserves, risky investments, or subsidies; whether in the event of platform bankruptcy, assets are isolated from creditors; and whether users can redeem directly, timely, and at par value.

Payments based on balances and time, and returns conditioned on holding funds, are interest-type products. The law should acknowledge them positively and then decide what licenses, disclosures, liquidity, and consumer protection rules apply. Escaping regulation by changing names should not be allowed. Expanding definitions to ban all rewards also should not be allowed.

6. What Really Harms the Financial System Is Regulatory Mismatch

The worst system is not one that allows stablecoins to compete.

It is one that allows them to enjoy user recognition as "like deposits" without bearing the core constraints of deposit products.

If a platform can market stablecoins as cash substitutes, pay yields based on balances, and direct reserves into long-term securities, corporate bonds, or related party assets, then the banks’ warning becomes entirely correct. This structure generates profits in good times and throws liquidity risk to users and the market in bad times.

Conversely, if stablecoins must hold cash and ultra-short-term treasuries, reserves are legally isolated, disclosed daily or frequently, subject to independent audits, have clearly defined redemption deadlines, and are prohibited from re-pledging reserve assets, then it is not the same as a high-leverage shadow bank. At that point, claiming the financial system is at greater risk just because it allocates benefits to users does not provide sufficient evidence.

Regulation should focus on four things: what reserves are, who owns the reserves, how to redeem them under pressure, and who bears the losses after failure.

As for whether yields exist, that is a secondary issue.

My Conclusion Is Clear

Wells Fargo pointed out a real risk, but provided an explanation that is most advantageous to the bank.

If stablecoins absorb large amounts of redeemable public funds, they will indeed change the banking financing structure. They may increase the funding costs of some banks. They could also concentrate liquidity risks on stablecoin issuers, custody banks, and the short-term treasury market. Without redemption rules, asset isolation, and pressure resolution mechanisms, such migration cannot simply be released based on "technological innovation."

However, banning platforms from providing any benefits to holders is not necessarily the answer that follows from these facts.

A more rational system is for similar activities to carry similar constraints. If promising par redemption, truly redeemable assets must be held. If paying interest based on balances and time, they must accept regulation for interest-type financial products. If doing marketing cashback, they must prove that rewards do not risk customer reserves. If scales are large enough to influence payment and treasury markets, they ought to increase liquidity, operational, and resolution requirements.

Banks should also accept competition. They cannot expect to earn market returns using near-zero cost deposits while demanding Congress ban others from returning earnings to depositors, only to package it as public safety.

What the Clarity Act truly needs to prevent is not money leaving banks, but risk leaving regulation.

Because financial security has never been about ensuring old players continue to access money cheaply, but about ensuring anyone who takes public money pays the cost of their commitments.

References

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