The saga of stablecoin regulations in the U.S. has unfolded like a gripping three-act play, pitting traditional banks and the Treasury against nimble tech disruptors in a high-stakes fight over the future of money. With trillions of dollars at stake, this drama revolves around stablecoins, digital dollars backed by real assets, that promise stability, efficiency, and innovation. But beneath the surface, it's a story of regulatory arbitrage, economic multipliers, and the relentless pursuit of market dominance. As foreign buyers like China and Japan pull back from U.S. Treasuries, stablecoins have emerged as a clever tool to shore up government borrowing. Yet, as tech giants like Coinbase and PayPal outmaneuver the rules, banks are crying foul, warning of catastrophic deposit drains that could cripple lending and the economy. Let's break it down act by act, drawing on recent developments like the GENIUS Act and the ongoing wrangling over the Digital Asset Market Clarity Act (CLARITY Act).
In the opening act, legislators crafted what seemed like a win-win for the government and banks. Facing declining foreign demand for U.S. Treasuries, Congress passed the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act in July 2025. This law mandated that stablecoins be backed 100% by ultra-safe assets: U.S. dollars, Treasuries, or money market funds (which themselves are heavy in Treasuries). The goal? Create a "non-economic buyer" for Treasury debt, stablecoin buyers who soak up bonds at any price, extending the government's borrowing capacity without relying on fickle international investors.
To ensure safety and prevent runs, the Act required these reserves to be segregated: they couldn't be used as bank assets for lending or leverage. In insolvency, stablecoin holders get priority payout, ahead of other creditors. But here's the sweetener for banks: the GENIUS Act explicitly banned issuers from paying interest or yields directly to stablecoin holders. This turned stablecoins into an interest-free pool of funds for banks. Issuers (often banks or regulated trusts) could park reserves in Treasuries yielding around 3.85%, pocket the interest, and keep it all, while holders got nothing. It was a dream setup: banks gained a lucrative revenue stream without the risk of competing on yields, all while amplifying monetary policy as primary dealers in Treasury auctions.
At the time, this seemed bulletproof. Banks could issue stablecoins, attract deposits without paying out, and use the interest to bolster profits. The Treasury benefited from steady demand for its debt, and consumers got reliable digital dollars for payments. But as we'll see, tech had other plans.
Enter the disruptors. In Act 2, tech giants flipped the script with clever partnerships that skirted the GENIUS ban, turning stablecoins into yield-bearing magnets. Coinbase teamed up with Circle, the issuer of USDC (over $30 billion in circulation). Circle didn't pay interest to holders, that would violate GENIUS. Instead, Coinbase, as a "marketing partner," shared in the reserve earnings (100% for on-platform holdings, 50/50 off-platform) and passed 3.50% back to users as "rewards" for simply holding USDC. PayPal followed suit with Paxos for PYUSD, funneling reserve yields into platform incentives or loyalty perks for its 400+ million users.
This wasn't just evasion; it was regulatory jujitsu. No direct issuer payout meant no violation, but the effect was the same: holders earned tidy yields on their digital dollars. Banks' no-yield stablecoins? They gathered dust. Users flocked to Coinbase and PayPal, not only bypassing bank-issued tokens but also draining traditional bank deposits. Why keep money in a near-zero savings account when stablecoins offered 3.50% with the same stability?
This shift echoed Ross Perot's famous 1992 warning about NAFTA: "You implement that NAFTA, the Mexican trade agreement, where they pay people a dollar an hour, have no health care, no retirement, no pollution controls, and you’re going to hear a giant sucking sound of jobs being pulled out of this country." Here, the "giant sucking sound" is deposits flowing from banks to tech platforms. Not only did banks lose the free interest they anticipated from stablecoins, but the broader deposit base, fuel for lending, has started to erode.
The economic stakes? Massive. Banks lend against deposits with a money multiplier of 3-5x, meaning each dollar deposited supports $3-5 in loans rippling through the economy. If just $1 trillion (half the projected stablecoin market by 2030) shifts to yield-bearing platforms, it could yank $3-5 trillion from circulation, triggering credit crunches, higher rates, and recessionary pain. Bank of America CEO Brian Moynihan echoed this in late 2025, warning that interest-paying stablecoins could drain $6 trillion from the system, devastating lending and the economy, precisely as I predicted as soon as GENIUS passed.
Banks fought back, lobbying the Treasury through the American Bankers Association (ABA) and Bank Policy Institute (BPI). In the August-November 2025 Request for Comment (RFC) on GENIUS implementation, they flooded submissions demanding closure of the interest "loophole," arguing third-party rewards undermined the Act's intent and risked disintermediating community lending.
Now, in January 2026, we're deep into Act 3 with the Digital Asset Market Clarity Act (CLARITY Act, H.R. 3633). This bill, which passed the House in 2025 and is stalled in the Senate Banking Committee due to amendments and opposition, builds on GENIUS by explicitly banning yields or rewards for passive stablecoin holding, including issuer-directed third-party perks like Coinbase's. It deems them equivalent to prohibited interest, aiming to stop the deposit bleed. However, it carves out exceptions for activity-based incentives (e.g., tied to transactions, liquidity, or staking) if they're independent and programmatic.
Coinbase CEO Brian Armstrong has drawn a "red line," blasting bank lobbying as hypocritical, banks earn 4% on Fed reserves while paying consumers zilch, and warning that bans would hurt Americans while boosting rivals like China's interest-paying digital yuan. On X, Armstrong notes the White House's constructiveness and ongoing talks with banks, especially to aid community banks. Yet, as I foresaw, Treasury and lawmakers lean toward banks: they're extensions of the system, primary dealers buying Treasuries, and amplifiers of Fed policy. Tech scares them with its speed and lack of control.
The CLARITY markup, postponed January 14, 2026, highlights the tension. Coinbase withdrew support over rewards erosion, DeFi privacy, and CFTC authority, but negotiations continue. I expect the final version to favor banks, closing the loophole to preserve GENIUS's goals: funding Treasuries via non-economic buyers, bolstering bank profits, and banning holder yields to prevent deposit flight.
This isn't the end. Tech companies, understanding the power of network effects, will keep innovating around restrictions. Early on, they're buying market share at any cost because controlling money means immense value. Banks and Treasury hold the regulatory leash, but Silicon Valley moves at internet speed. Expect more battles, perhaps loosening stablecoin backing assets, as the war for financial dominance rages on. It's a fascinating dance between government, banks, and crypto, with the economy hanging in the balance.
I've been tracking this drama closely, and many of my early calls have proven spot-on as CLARITY advances. Here are key predictions, with direct quotes and links to my original X posts (archived at https://mph-intl.com/stablecoins/ for full context):
These insights, shared well before CLARITY's draft, highlight how tech's innovations force regulatory evolution, but banks' systemic role gives them the edge.
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