Lede
The introduction of the CLARITY Act has sparked significant debate within the financial sector due to its strict prohibition on yield-bearing stablecoins. This legislative move, which serves as a market structure framework for the United States, effectively prevents crypto exchanges and service providers from offering interest or rewards to customers holding these digital assets. Anthony Scaramucci, the founder of SkyBridge Capital, has been vocal about the potential repercussions of this policy, suggesting that the current system is fundamentally broken. By restricting the ability of stablecoin issuers to provide yield, the act may be placing the US dollar at a severe competitive disadvantage on the global stage.
Brian Armstrong, the CEO of Coinbase, has also issued warnings regarding the long-term impact of these restrictions. He argues that prohibiting yield on US-based stablecoins directly undermines the dollar’s dominance by making it less attractive compared to international alternatives in foreign exchange markets. According to Armstrong, the inability to offer rewards does not fundamentally change the nature of lending, but it does significantly hinder the competitiveness of US digital assets. The concern is that users, particularly those in emerging economies, will seek out digital currencies that offer financial incentives, potentially leading them away from dollar-pegged options that are restricted by the CLARITY Act’s provisions.
Context
The regulatory environment for digital currencies in the United States has evolved through successive legislative efforts, with the CLARITY Act expanding upon the groundwork laid by the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act. While the GENIUS Act established an initial framework for US dollar stablecoins, the CLARITY Act has broadened the scope of the prohibition against yield-bearing features. This domestic approach stands in stark contrast to the strategy adopted by the People’s Bank of China regarding its central bank digital currency (CBDC). The Digital Yuan is specifically designed as a yield-bearing instrument, which provides it with a distinct structural advantage in the digital economy.
In a significant move earlier this year, the People’s Bank of China began allowing commercial banks to pay interest on digital yuan deposits starting in January. This policy highlights a growing disparity between US and Chinese digital currency strategies. While US regulations move to restrict interest-bearing digital assets to protect existing financial structures, China is actively integrating yield to encourage adoption. This difference in methodology raises questions about which “rail system” global users will prefer. Industry observers note that the Chinese model creates a direct incentive for holding the Digital Yuan, whereas the US model, restricted by the CLARITY Act, removes such incentives for dollar-backed stablecoins. This divergence could have lasting implications for how digital trade is conducted internationally.
Impact
The motivation behind the ban on yield-bearing stablecoins appears to be rooted in the protection of the traditional banking industry. Various crypto industry executives have claimed that the prohibition was introduced to choke off competition from stablecoin issuers who might otherwise draw customers away from legacy banks. The scale of the threat to traditional finance was underscored by Brian Moynihan, the CEO of Bank of America, during a recent earnings call. Moynihan warned that the rise of stablecoins could lead to a massive exodus of capital, estimating potential bank deposit outflows of up to $6 trillion. Such a significant flight of customer deposits could drastically reduce the lending capacity of the entire banking sector, posing a risk to traditional economic stability.
This $6 trillion figure represents a core pain point for the banking industry and explains the push for restrictive measures in the CLARITY Act. However, the impact of these measures extends beyond domestic bank protection. By prioritizing the stability of incumbent banks, the legislation may be sacrificing the growth of the US digital asset sector. Brian Armstrong and other critics suggest that this focus on protecting traditional institutions ignores the broader necessity of keeping the US dollar competitive in a digital-first world. The tension between preventing a $6 trillion outflow from bank accounts and fostering a competitive digital dollar remains a primary conflict in the current regulatory landscape, as the government seeks to balance innovation with the preservation of existing financial systems.
Outlook
The long-term outlook for the US dollar’s global role may depend on how the market reacts to the yield prohibitions established by the CLARITY Act. Anthony Scaramucci has pointed out that emerging countries will likely choose the digital rail system that provides the most utility, specifically questioning if they will opt for a system without yield when a yield-bearing alternative like the Digital Yuan is available. As the Digital Yuan continues to offer interest through commercial banks, the US dollar risks losing its status as the preferred medium for digital transactions in developing markets. Brian Armstrong’s warning that the US is “missing the forest through the trees” suggests that short-term protectionism could lead to long-term decline in foreign exchange competitiveness.
If the prohibition on yield remains in place, the US may find itself struggling to maintain the dollar’s dominance as the world transitions to digital payments. The competition between a yield-bearing CBDC and a non-yield-bearing stablecoin market could redefine international finance. Future legislative adjustments may be necessary if the $6 trillion threat to bank deposits is outweighed by the risk of the dollar being replaced by more attractive digital currencies. For now, the CLARITY Act ensures that US stablecoins will operate without the incentive of rewards, a move that will test the loyalty of global users to the dollar in an environment where interest-bearing digital alternatives are becoming increasingly accessible.
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