The battle over stablecoin yields: How has it stalled U.S. cryptocurrency regulation legislation?

Written by: Oluwapelumi Adejumo

Compiled by: Saoirse, Foresight News

The legislative effort, supported by the president, aimed at establishing more comprehensive regulatory rules for the U.S. cryptocurrency market, is nearing a political deadline at the congressional level. Meanwhile, the banking sector is pressuring lawmakers and regulators to ban stablecoin companies from offering yields similar to bank deposit interest.

This contest has become one of the core unresolved issues in Washington’s cryptocurrency agenda. The focal point of the debate is whether stablecoins pegged to the dollar should focus on payment and settlement functions or can incorporate financial attributes that compete with bank accounts and money market funds.

The Senate’s market structure bill, known as the “CLARITY Act,” has stalled due to a breakdown in negotiations surrounding the so-called “stablecoin yield.”

Industry insiders and lobbyists have stated that if the bill is to have a realistic chance of passing before the election-year agenda tightens, late April to early May will be the practical window for advancing the legislation.

Congressional Research Service Sharpens Legal Controversy

The Congressional Research Service’s definition of the issue is narrower than the scope of public debate.

In a report on March 6, the Congressional Research Service pointed out that the “GENIUS Act” prohibits stablecoin issuers from directly paying yields to users, but the bill does not fully clarify the legality of what it calls the “third-party model”—where intermediaries such as exchanges are positioned between issuers and end users.

The Congressional Research Service indicated that the bill does not clearly define “holders,” leaving room for debate about whether intermediaries can still pass on economic benefits to customers. This ambiguity is the core reason why the banking sector hopes Congress will clarify this in a broader market structure bill.

The banking sector believes that even limited yield incentives could make stablecoins formidable competitors to bank deposits, particularly impacting regional and community banks.

However, crypto firms argue that incentives tied to payments, wallet usage, or network activity can help digital dollars compete with traditional payment channels and are expected to boost their status in mainstream finance.

This divergence also reflects differing perceptions of the future development positioning of stablecoins.

Infographics show that as the usage scale of digital dollars continues to expand, there is a significant divide between banks and crypto firms on the question of “who should benefit from stablecoin yields.”

If lawmakers primarily view stablecoins as payment tools, the rationale for implementing stricter limits on related rewards becomes stronger. Conversely, if lawmakers see them as part of a significant transformation in how digital platforms transfer value, then supporting limited incentives becomes more justified.

The banking industry has urged lawmakers to close what they term “regulatory loopholes” before such reward mechanisms become more widespread. Banks claim that allowing idle balances to earn rewards will lead depositors to withdraw funds from banks, thereby weakening the core source of funds for banks to lend to households and businesses.

Standard Chartered Bank estimated in January that by the end of 2028, stablecoins could withdraw about $500 billion in deposits from the U.S. banking system, with small and regional banks bearing the brunt of the pressure.

Infographics compare why banks and cryptocurrency focus on the stablecoin bill, showcasing deposit outflows, impacts on lenders, cash-back rewards, and banking protectionism.

The banking sector is also attempting to demonstrate to lawmakers that their position enjoys public support. The American Bankers Association recently released a poll result:

• When the question was posed: “If stablecoin yields are allowed, could this lead to a reduction in the funds banks can lend, impacting communities and economic growth?” respondents supported Congress banning stablecoin yields by a ratio of 3:1;
• By a ratio of 6:1, they believe that legislation related to stablecoins should be cautious to avoid undermining the existing financial system, especially community banks.

But the crypto industry counters that the banking sector merely wants to protect its funding model by limiting competition from digital dollars.

Industry figures, including Coinbase CEO Brian Armstrong, argue that under the “GENIUS Act,” the reserve requirements for stablecoin issuers are stricter than those for banks—issued stablecoins must be fully backed by cash or cash equivalents.

Increasing Trading Volumes Elevate the Stakes in Washington

The market size has made this yield dispute impossible to be seen as a niche issue.

Boston Consulting Group estimates that last year the total circulation scale of stablecoins was about $62 trillion, with real economic activity being roughly $4.2 trillion after excluding activities like bot trading and internal circulation within exchanges.

The vast gap between apparent trading volume and actual economic use also explains why the “yield” dispute has become so critical.

If stablecoins primarily remain tools for trading and market structure settlement, lawmakers will find it easier to limit them to payment tools; but if the yield mechanism turns stablecoins into widely used cash storage tools in user apps, the pressure on banks will rapidly increase.

To this end, the White House earlier this year tried to broker a compromise: allowing partial yields for limited scenarios like peer-to-peer payments while prohibiting returns on idle funds. Crypto firms accepted this framework, but the banking sector rejected it, causing Senate negotiations to come to a complete standstill.

Even if Congress does not act, regulatory agencies may tighten yield models.

The Office of the Comptroller of the Currency proposed in a rule implementing the “GENIUS Act” that if stablecoin issuers provide funds to affiliates or third parties, which then pay yields to stablecoin holders, this would be deemed a disguised distribution of prohibited yields.

This means that if Congress cannot legislate a directive, the executive branch may delineate boundaries through regulatory rules.

Time is Running Out for Congress

Currently, the contest is divided into two lines:

• Congress is debating whether to resolve the issue through codified law;
• Regulatory agencies are defining the boundaries of corporate behavior under the existing legal framework.

Time itself is the greatest pressure for the Senate bill.

Alex Thorn, research director at Galaxy Digital, wrote on social media:

If the “CLARITY Act” cannot pass committee review by the end of April, the probability of it passing in 2026 will be very low. The bill must be presented for a full Senate vote in early May. Legislative time is running out, and with each passing day, the chances of passage decrease.

He also warned that even if the yield dispute is resolved, the bill’s breakthrough remains uncertain:

Currently, the external perception is that the yield dispute is what is holding up the “CLARITY Act.” But even if a compromise on the yield issue is reached, the bill is still likely to face other obstacles.

These obstacles may include decentralized finance regulation, regulatory agency authority, and even ethical issues.

Before the mid-term elections in November, crypto regulation is likely to become a larger political battleground. This adds urgency to the current stalemate—if the bill is delayed, it will face a more crowded political agenda and a more challenging legislative environment.

Prediction markets also reflect a shift in sentiment. In early January, Polymarket gave the bill an approximately 80% chance of passing; after recent setbacks (including Armstrong stating the current version is unworkable), the probability has dropped to nearly 50%.

Kalshi data shows that the probability of the bill passing before May is only 7%, and the probability of passing by the end of the year is 65%.

The Failure of the Bill Will Shift More Power to Regulators and Markets

The impact of failure goes far beyond the yield dispute. The core purpose of the “CLARITY Act” is to define whether crypto tokens fall under securities, commodities, or other categories, providing a clear legal framework for market regulation.

Once the bill stalls, the entire industry will become more reliant on regulatory guidance, temporary rules, and future political changes.

This is also one of the reasons the market is highly focused on the fate of the bill. Bitwise Chief Investment Officer Matt Hougan stated earlier this year that the “CLARITY Act” would codify the currently favorable regulatory environment for crypto; otherwise, future governments might reverse existing policies.

He wrote that if the bill fails, the crypto industry will enter a period of “proving itself,” needing three years to demonstrate its indispensability to the general public and traditional finance.

In this logic, the industry’s future growth will rely less on the expectation of “legislative grounding” and more on whether products like stablecoins and asset tokenization can truly achieve large-scale implementation.

This presents the market with two distinctly different paths:

• Bill passes → Investors price in the growth of stablecoins and tokenization in advance;
• Bill fails → Future growth relies more on actual adoption while facing uncertainty from shifting Washington policies.

A flowchart illustrates the countdown to the Senate’s stablecoin decision, with deadlines on March 6 and late April or early May leading to two paths: if Congress takes action, there will be regulatory clarity and faster growth; if Congress fails to act, uncertainty will arise.

At this stage, the next steps lie in Washington. If senators can restart this market structure bill this spring, lawmakers can still personally define the extent to which stablecoins can pass value to users and the scope of the crypto regulatory framework that can be codified. If they cannot, regulatory agencies have clearly prepared to delineate at least some of the rules themselves.

Regardless of the outcome, this debate has long transcended the question of “whether stablecoins belong to the financial system,” delving instead into how stablecoins will operate within the system and who will benefit from their development.