Before the U.S. Senate entered a critical voting phase on the CLARITY legislation, eight American banking organizations wrote to congressional leaders, requesting stricter restrictions on the returns of payment-style stablecoins. Banks argue that if stablecoins offer returns close to deposit interest in the form of rewards, it could lead to funds shifting from bank accounts to stablecoins, thereby reducing the lending capacity of community banks.

The banking industry questions the circuit breaker clause

Co-signing organizations include the Bankers Association of America, the Bank Policy Institute, the Independent Community Bankers Association of America, and the National Association of Bankers of America, among others. They stated that payment-style stablecoins are primarily intended for use in payments, rather than as a substitute for deposit accounts.

These institutions claim that once users transfer more funds into stablecoins, the amount of money available for banks to issue housing loans, small business loans, and agricultural loans will decrease. They also believe that the "deposit loss circuit breaker mechanism" outlined in the bill will only be activated after a large-scale loss has already occurred, making it difficult for it to be effective in advance.

The banking industry calls for amendments to the regulations.

Banking organizations are requesting amendments to Section 10404(c)(1) of the CLARITY legislation. They wish to remove “solely” from 10404(c)(1)(A), as well as phrases such as “on a payment stablecoin balance” and “on an interest bearing bank deposit” from 10404(c)(1)(B).

They also suggested changing the criteria in the bill, which are “economically or functionally equivalent”, to “substantially similar”. The banking sector argues that this will reduce room for interpretation and make it more difficult for crypto companies to indirectly offer benefits similar to deposit interest through reward designs.

In addition, the banking industry also requests the deletion of clause 10404(3)(B). This clause allows certain rewards to be linked to the customer's balance, the duration of holding, or the length of time the account has been in existence. Banks believe that these factors are already common bases for calculating interest on bank deposits, and retaining this clause would weaken the income restrictions.

The Treasury Department and the White House refute

U.S. Treasury Secretary Besenst defends the circuit breaker mechanism in the bill, stating that this tool gives the Treasury Department greater intervention capabilities when stablecoin pairs put deposit pressure on community banks. He said that if stablecoins indeed harm community banks, the Treasury Department will use relevant tools to protect them.

White House encryption advisor Patrick Witt opposes the notion of "deposit outflows," stating that stablecoin incentive mechanisms have existed for many years. If this issue is already serious enough, the scale of bank deposits should not continue to grow. Professor at Columbia Business School, Omid Malekan, also compares this debate to the early opposition from the banking industry to money market funds, suggesting that similar warnings have appeared in the past.