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

Written by: Oluwapelumi Adejumo

Compiled by: Saoirse, Foresight News

The legislation supported by the president, aimed at establishing more comprehensive regulatory rules for the U.S. cryptocurrency market, is approaching a political deadline in Congress. Meanwhile, the banking industry is pressuring lawmakers and regulators to ban stablecoin companies from offering yields similar to bank deposit interest.

This struggle has become one of the most critical unresolved issues in Washington’s crypto agenda. The focus of the debate is: should stablecoins pegged to the U.S. dollar concentrate on payment and settlement functions, or can they also increase their financial attributes to compete with bank accounts and money market funds?

The Senate’s market structure bill, named the “CLARITY Act,” has stalled due to a breakdown in negotiations over so-called “stablecoin yields.”

Industry insiders and lobbyists say that if the bill is to have a realistic chance of passing before the election year schedule tightens, late April to early May will be a practical window for its advancement.

Congressional Research Service Sharpens the Legal Debate

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

In a report dated March 6, the Congressional Research Service noted 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 like exchanges are positioned between issuers and end users.

The Congressional Research Service states that the bill does not explicitly define “holders,” leaving room for debate over whether intermediaries can still pass economic benefits to customers. This gray area is the core reason the banking industry wants Congress to clarify in a broader market structure bill.

The banking industry believes that even limited yield incentives could make stablecoins strong competitors to bank deposits, particularly impacting regional and community banks more severely.

However, crypto companies argue that incentives linked to payments, wallet usage, or network activities can help digital dollars compete with traditional payment channels and are expected to enhance their standing in mainstream finance.

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

An infographic shows that as the scale of digital dollar usage continues to expand, there is a significant divide between banks and crypto companies on the question of “who should benefit from stablecoin yields.”

If lawmakers primarily view stablecoins as payment tools, then there is a stronger justification for implementing stricter limits on related rewards. Conversely, if they see them as a significant transformation of value transfer in digital platforms, then supporting limited incentives becomes more tenable.

The banking industry association has urged lawmakers to close what they call “regulatory loopholes” before such reward mechanisms become more widespread. The banking sector argues that allowing idle balances to earn rewards would lead depositors to withdraw funds from banks, thereby undermining the core funding source for banks to lend to households and businesses.

Standard Chartered Bank estimated in January that by the end of 2028, stablecoins could siphon off about $500 billion in deposits from the U.S. banking system, with small and medium-sized banks facing the greatest pressure.

An infographic compares why banks and cryptocurrencies are concerned about the stablecoin bill, showcasing issues like deposit loss, impacts on lenders, cash-back rewards, and banking protectionism.

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

• When asked, “If stablecoin yields are allowed, could it lead to a decrease in bankable funds available for lending, impacting communities and economic growth?” respondents supported Congress banning stablecoin yields by a ratio of 3:1;
• They believe by a ratio of 6:1 that stablecoin-related legislation should be cautious to avoid disrupting the existing financial system, especially community banks.

But the crypto industry counters that the banking sector simply 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.

Rising Trading Volumes Raise Stakes in Washington’s Battle

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

Boston Consulting Group estimates that last year, the total circulation of stablecoins was around $62 trillion, and after excluding activities like bot trading and internal exchange circulation, the actual economic activity was only about $4.2 trillion.

The huge disparity between surface trading volume and actual economic use explains why the “yield” dispute has become so critical.

If stablecoins mainly remain tools for trading and market structure settlement, lawmakers can more easily restrict them as 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 attempted to broker a compromise: allowing partial yields in limited scenarios like peer-to-peer payments, while prohibiting returns on idle funds. Crypto companies accepted this framework, but the banking industry rejected it, leading to a deadlock in Senate negotiations.

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

In a proposed rule implementing the “GENIUS Act,” the Office of the Comptroller of the Currency stated: if stablecoin issuers provide funding to affiliates or third parties, and then pay yields to stablecoin holders, it will be deemed a disguised distribution of prohibited yields.

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

Congress Has Little Time Left

The current struggle is divided into two lines:

• Congress debates whether to solve the issue through codified law;
• Regulatory agencies are defining the boundaries of corporate behavior within the existing legal framework.

For the Senate bill, time itself is the greatest pressure.

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

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

He also warned that even if the yield dispute is resolved, the bill’s breakthrough cannot be considered optimistic:

Currently, the outside world believes the stablecoin yield dispute has stalled the “CLARITY Act.” But even if a compromise is reached on the yield issue, 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 midterm elections in November, crypto regulation is likely to become a larger political battleground. This makes the current deadlock more urgent—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 a passing probability of about 80%; after recent setbacks (including Armstrong stating the current version is unfeasible), 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 before the end of the year is 65%.

The Failure of the Bill Will Hand More Power to Regulators and the Market

The impact of failure goes far beyond the yield dispute. The core purpose of the “CLARITY Act” is to define whether crypto tokens fall into the categories of securities, commodities, or others, 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 shifts.

This is also one reason the market is highly focused on the bill’s fate. Matt Hougan, chief investment officer at Bitwise, stated earlier this year that the “CLARITY Act” would enshrine the current favorable regulatory environment for crypto into law; 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.

Within this logic, the future growth of the industry will rely less on expectations of “legislative enactment” 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 depends more on actual adoption, while facing uncertainties from shifting political winds in Washington.

A flowchart illustrates the countdown for Senate stablecoin decisions, with March 6 and the late April or early May deadlines leading to two paths: if Congress acts, it will bring regulatory clarity and faster growth; if Congress fails to act, uncertainty will ensue.

At this stage, the next step is in Washington’s hands. If senators can restart this market structure bill this spring, lawmakers can still personally define the extent to which stablecoins can transfer value to users and the range of crypto regulatory frameworks that can be codified into law. If they cannot, regulatory agencies are clearly prepared to delineate at least some rules on their own.

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