Stablecoin vs Banks

Or, Defi versus TradFi

Senate Banking Committee Chairman Tim Scott (R-S.C.), published HR 3633 on January 12, which laid out an initial set of rules to govern “the offer and sale of digital commodities by the Securities and Exchange Commission and the Commodity Futures Trading Commission, to amend the Federal Reserve Act to prohibit the Federal reserve banks from offering certain products or services directly to an individual, to prohibit the use of central bank digital currency for monetary policy, and for other purposes.

The first markup of the bill’s text was scheduled to be published on January 18, but the committee declined to do so after 137 amendments were proposed, Coinbase CEO Brian Armstrong withdrew his support, as a deep chasm opened between the traditional banking industry and crypto industry on the subject of yield.

A “markup” in the Senate Banking Committee is the formal meeting where senators debate, change, and vote on the text of a bill before deciding whether to send it to the full Senate.

Armstrong’s withdrawal of support came after he said the bill had “too many issues” and would “"kill" crypto companies' ability to offer rewards” to customers for holding stablecoins.

The American Banking Association, the principle lobby group for the traditional commercial banking sector, is lobbying the committee to ban yield on stablecoins under any circumstances, citing a “$6 trillion capital flight risk” from the banking system.

Banking lobby groups argue that allowing yield or rewards on payment stablecoins threatens bank funding, credit availability, and the basic policy design of “payments‑only” stablecoins, so they want an explicit, comprehensive ban that covers issuers, affiliates, and exchanges.

Their case rests on systemic‑risk and “level playing field” claims: that yield-bearing stablecoins would siphon trillions from insured deposits, force banks to raise rates, and let lightly regulated platforms run a de facto shadow banking system.

Core economic arguments

• Yield on stablecoins will trigger large “deposit flight” from banks, because consumers will park savings in higher‑yield, dollar‑denominated stablecoins instead of low‑yield bank deposits.

• Banking groups cite Treasury-linked estimates that up to about $6.6 trillion in deposits could be at risk, which they say would directly reduce the funds banks use to make mortgages, small‑business loans, farm credit, and other community lending.

• They argue that if banks must raise deposit rates to compete with stablecoin yields, the cost of credit will rise across the economy, hurting borrowers such as homebuyers, students, and small businesses.

The self-serving nature of the banks’ arguments are clear: Stablecoins constitute an existential risk to the traditional banking industry, which is exactly what drives interest among consumers.

The capital flight to Stablecoins they cry about is simply a competitive outcome.

Their argument implying higher cost of loans and less available lending capacity is disingenuous; Stablecoin lending is already disintermediating traditional lending, and will continue to do so with its superior 24/7 service model and instant reallocation capabilities.

The standoff is simple: Banks pay minimal interest on deposits to customers, and harvest the spread between the US Treasuries they hold to back their loans as a result. Stablecoin issuers like Circle propose to reward customers with higher yield to encourage preference of stablecoins over other forms of savings. That would result in a massive capital migration into stablecoin and away from banks.

Yield is currently generated by Stablecoins and cryptocurrencies via lending and market making, in addition to rewards, and any rule to block that would be detrimental to the entire crypto industry.

The American Banking Association has a $100 million budget to persuade the committee to ban almost all forms of yield outright.

But Trump, who profits personally from his own Stablecoin, and would clearly benefit from the preservation of yield strategies in the bill, will likely be the deciding factor behind the scenes.

Negotiations are likely occurring at the highest level behind the scenes, as this is the watershed moment that could gut traditional banking and ignite the future of crypto on all fronts.

The issue is further complicated by the fact that the crypto industry would continue to pay yield offshore, which could result in the US missing its chance to be the center of the crypto universe.

From a consumer’s perspective, yield-bearing stablecoins can be a net positive, but only if several nontrivial risks are solved; right now, those risks are real and unevenly regulated.

The banking lobby is highlighting gaps that matter for consumers (insurance, run risk, legal treatment in bankruptcy), even if it is also clearly protecting its own economics.

Real consumer upsides

Higher effective return: Retail users could earn more on idle cash than on traditional checking/savings, especially in a low‑rate or low‑pass‑through environment.

Better UX and programmability: Stablecoins can move 24/7, integrate with DeFi and fintech apps, and support programmable payments, which can make budgeting, remittances, and cross‑border activity cheaper and more flexible.

Competitive pressure on banks: The threat of deposit flight can push banks to raise deposit rates or improve services, indirectly benefiting even those who never touch a stablecoin.

Key risks that don’t exist with insured deposits

• No deposit insurance: Stablecoin balances, even when issued by banks, are generally not insured like deposits; if the issuer or platform fails, users can be treated as unsecured creditors and may take losses or face long freezes.

• Run and redemption risk: If reserves are invested in longer‑duration or riskier assets to generate yield, a loss of confidence or market shock can break the peg, trigger runs, and force fire‑sales or gated redemptions.

• Platform and legal risk: Many yield programs are offered by intermediaries (exchanges, wallets) that combine custody, lending, and trading, with weak segregation of client assets and unclear contractual terms about who owns what in a failure.

When it could be net positive for consumers

• Clear, bank-like safeguards: If yield‑bearing stablecoin products are subject to capital, liquidity, conduct rules, segregation of client assets, and clear redemption-at-par requirements, many of the current concerns shrink substantially.

• Transparent risk–return disclosure: Consumers would need plain‑language disclosure that makes the trade‑off explicit: no FDIC insurance, how reserves are invested, what happens in insolvency, and how yield is generated.

Functional competition, not shadow deposits: Policymakers are trying to distinguish between:

1. Payment stablecoins that behave like cash and are tightly regulated, and

2. Higher‑yield “investment” products that are clearly labeled as such and not quietly sold as deposit equivalents.

In that kind of regime, the combination of earning more on unused balances while still accessing credit from well‑regulated stablecoin lender would be a net consumer gain, but without those guardrails, consumers are trading away insurance and stability for yield in ways that many do not fully understand.