Introduction
Influential cryptocurrency executives are lobbying Congress to allow interest payments on U.S. dollar-pegged tokens as part of upcoming legislation aimed at establishing a regulatory framework for stablecoins.Context
This lobbying effort has elicited mixed responses from lawmakers and has raised concerns among financial industry regulators. They warn that yield-bearing stablecoins might incentivize consumers to withdraw their deposits from regulated banks in favor of uninsured crypto accounts. Stablecoins, which aim to maintain a constant value—typically pegged at 1:1 with the U.S. dollar—have become increasingly popular among crypto traders for facilitating transactions.Developments
The debate continues over whether stablecoins should be classified as cash or akin to bank deposits eligible for interest. Coinbase CEO Brian Armstrong expressed that the government should avoid favoring one industry over another, urging that both banks and crypto firms should equally be allowed to share interest with consumers.Stablecoin issuers like Tether and Circle currently maintain their dollar peg by holding U.S. Treasuries and cash equivalents. Although these firms earn returns on their assets, they do not share this yield with token holders. Chen Arad, co-founder of Solidus Labs, advocated for allowing issuers to distribute yields to depositors since they already possess the necessary assets.
Congress is now nearing the passage of a bill to establish stablecoin regulations for the first time. Both the House of Representatives and the Senate have introduced bills, with the Senate Banking Committee moving one forward last month and the House Financial Services Committee approving another. However, the House bill currently prohibits interest payments by stablecoin issuers, while the Senate’s version is less explicit.
Some lawmakers, like Republican Chairman French Hill, do not equate stablecoins to traditional bank accounts, indicating a lack of consensus on this issue. Meanwhile, Dante Disparte of Circle argued that payment stablecoins should be seen as regulated electronic money rather than traditional financial products. He suggested that allowing interest be determined by the marketplace rather than by the issuers.
Despite the mixed reactions, there remains a possibility that lawmakers could incorporate provisions allowing issuers to pay interest in the final bill. Concerns loom, however, about the crypto industry's rising influence in Washington, where significant funds were funneled into pro-crypto congressional candidates in previous elections. Experts warn that permitting interest-bearing crypto products might jeopardize the stability of the banking system, as banks rely on deposits for lending.
Arthur Wilmarth, a law professor at George Washington University, called it an existential threat to both the banking industry and the broader financial system, proposing that taxpayers might eventually bear the consequences.
As political pressures mount, Trump's advisors are pushing for a stablecoin bill to be passed before August with little commentary on the interest issue. The American Bankers Association has urged legislators to reject any provisions that could distract from the crucial role banks play in credit intermediation, labeling the potential shift to stablecoins as a significant risk.
However, allowing interest payments could provide benefits for consumers, according to Navin Gupta, CEO of Crystal Intelligence. He acknowledged the potential for financial instability but also recognized the necessity of creating financial instruments that better align with consumer needs.