The CLARITY Act has advanced through the Senate Banking Committee. The yield language on stablecoins has been the primary holdup for months. We appear to have a workable compromise: crypto firms cannot pay interest "economically or functionally equivalent" to a bank deposit, while carving out rewards for "bona fide activities or bona fide transactions."
Implicit in this debate is that stablecoins compete with bank deposits. This is wrong – stablecoins don’t compete with bank deposits. Stablecoins compete with payments.
Stablecoins are not a meaningfully better store of value
Stablecoins are extremely safe – they’re backed one-to-one by high quality liquid assets, but banking in the US is remarkably safe too. FDIC-insured deposits are backed by the full faith and credit of the US government. Stablecoin reserves are held largely in treasuries, again backed by the full faith and credit of the US government. For large deposits that exceed FDIC coverage (practically as high as $250M+ with IntraFi), we can debate whether a bank is a safer place to hold funds than in stablecoins. At minimum, stablecoins are not substantially safer than a GSIB.
If stablecoins were to offer yield, they might have advantages over checking and savings accounts. But this product would be functionally equivalent to a high-yield savings account or sweep account. Furthermore, banks have structural advantages that enable them to earn yield in excess of the risk-free rate. Again, stablecoins are not substantially better than a competitive banking product.
It is true that stablecoins are valuable for holding money in some places where people cannot access dollars. But this group is primarily limited to emerging markets, and these are certainly not the deposits the US banking lobby is worried about losing.
Stablecoins will not gain mass US adoption because they are better at holding value or a fundamentally better asset for earning the risk-free rate.
Stablecoins are a better payment rail
Stablecoins will change the world because they are the best technology for moving money: fast, cheap, global, programmable, and available around the clock.
GENIUS-compliant payment stablecoins are highly fungible and therefore well suited for broad, interchangeable acceptance.
Stablecoins will revolutionize payments, not deposits.
Payments don’t compete with deposits
A number of studies have come out recently suggesting anywhere from $50 billion to $1 trillion could realistically migrate from bank deposits to stablecoins in the next five to ten years.
These estimates misunderstand what stablecoins are good at. The same speed, cost, and programmability that make stablecoins an exceptional payment rail also make stablecoins unlikely to be the asset of choice for storing large amounts of money at rest.
Today, companies may hold a few weeks or months of operating capital in actual cash in an operating account, because it may take days or weeks to liquidate other assets. Companies have to factor in when markets are open and payment rails operate. They have to keep buffers to be safe.
Stablecoins will collapse this time to hours, minutes, or seconds. It will become trivially easy to move money in and out of stablecoins into other, better assets for holding and earning. When funds come in, they move programmatically into better yield-bearing assets such as money-market funds, CDs, repos, and maybe some riskier assets like commercial paper or bitcoin (or tokenized versions of these).
When funds need to be sent or spent, these other assets get sold and converted to stablecoins – this can all happen instantly, cheaply, programmatically, and 24/7.
The amount needed to hold in a cash buffer (i.e. a deposit account) will be reduced.
A helpful compromise accelerant
The yield compromise in CLARITY pushes stablecoins in the right direction. The latest language bars passive yield on stablecoin holdings but carves out rewards tied to "bona fide activities or bona fide transactions." In practice, this forces the industry from a “buy and hold” rewards model to a “buy and move” model.
Great! Stablecoins won’t revolutionize holding money. They will revolutionize moving it.
