Clarity Act’s failure seen as a victory but stablecoin loopholes remain

The Clarity Act’s failure to advance was a victory for the banking industry, but stablecoin-related loopholes need to be resolved through legislation, banking professionals told BankNews.com in recent interviews..The Senate on Sept. 15 rejected cloture on the Digital Asset Market Clarity Act (HR-3633) by a vote of 49-50, falling short of the 60-vote cloture threshold. Banking associations opposed the legislation largely because the final language didn’t adequately prohibit stablecoin issuers from paying out interest, yield and rewards (IYR). The 2025 Genius Act (S. 1582) banned stablecoin issuers from paying IYR to coinholders, but it didn’t prohibit indirect payments through cryptocurrency exchanges and third party affiliates. The banking industry sought to close this loophole through the Clarity Act and calm continued fears of deposit flight, with billions of dollars at risk.Sens. Thom Tillis, R-N.C., and Angela Alsobrooks, D-Md., negotiated compromise language in the Clarity Act intended to create a marketwide ban on IYR, covering exchanges and third parties.It was a reasonable concept in theory, but the final language didn’t “accomplish that goal adequately,” said Iowa Bankers Association CEO Adam Gregg. The language was “too easy” to work around.The compromise language was “neutered” by several subsections in the final bill, said Independent Community Bankers of America Executive Vice President-Congressional Relations Paul Merski. “It would have been far worse to pass Clarity and lock into statute loopholes for the payments of interest and yield by stablecoin. The status quo is better than locking in loopholes.”Senate Banking Committee Chairman Tim Scott, R-S.C., who led Clarity Act efforts in the upper chamber, in his statement following the vote blamed Democrats. He said it’s time for the SEC and CFTC to “set clear rules of the road for digital assets until Congress legislates.”The SEC and CFTC are among federal agencies working through rules and regulatory proceedings on digital assets. Genius Act proceedings are under way from the Treasury Department, its Office of the Comptroller of the Currency, the Federal Reserve Board, Financial Crimes Enforcement Network, the Federal Deposit Insurance Corporation and the National Credit Union Administration. The crypto industry’s attempt to ‘legitimize’ stablecoinThe Clarity Act is the crypto industry’s attempt to legitimize stablecoins, Merski said. Despite the coins existing for about a decade, there “hasn’t been dramatic, widespread adoption,” and crypto associations are spending considerable time and resources to change that reality, he said.The Iowa Bankers Association supports the Clarity Act in the sense that there needs to be regulatory structure around digital assets, Gregg said. The bill’s failure was positive in the sense that Congress avoided baking in the IYR loopholes, but legislation is still needed to shore up gaps left by the Genius Act, he said: “We need something to pass on that front.”The Indiana Bankers Association estimates that about $5.3 billion in the Hoosier state alone is at risk of deposit flight if the yield issues aren’t addressed. “Not addressing the yield provision would have made Clarity much more troubling and problematic for us,” said Indiana Bankers Association Chief Policy Officer Dax Denton. “Clarity is probably our last and best opportunity to address the yield provision, the trailing amendment to Genius from last year.”The Blockchain Association, the Crypto Council for Innovation and the Digital Chamber were among the crypto entities pushing for passage of the Clarity Act. They wrote Senate leaders in July, calling the bill a “crucial opportunity for the Senate to improve upon the status quo by establishing durable rules for digital assets that protect consumers, safeguard markets, and ensure that innovation can thrive in the United States.”The Blockchain Association and Crypto Council for Innovation didn’t respond to requests for comment. Coinbase Global CEO Brian Armstrong in September blamed “politics” for the Clarity Act’s failure, and like Sen. Scott, he called for a path forward with the SEC and CFTC. Associations skeptical of Clarity Act passage without yield languageNational banking entities that opposed the Clarity Act’s yield language included American Bankers Association, Association of Military Banks of America, Bank Policy Institute, Consumer Bankers Association, Financial Services Forum, Independent Community Bankers of America, Mid-Size Bank Coalition of America and National Bankers Association. They wrote Senate leaders in September asking legislators to address “critical concerns raised by banks of all sizes regarding the risk of deposit flight and diminished credit and lending associated with permitting yield on payment stablecoins.”“There’s strength in numbers there,” said Denton of the coalition of national entities. A unifying industry voice is “very powerful.”Throughout the legislative process, the crypto industry tried to portray the banking industry as anticompetitive and fearful of new technology, said Gregg. Bankers aren’t opposed to competition from emerging platforms, he said: They just want “targeted fixes” for the gaps left by the Genius Act.The banking industry welcomes competition from the crypto sector, Merski said. But if a crypto entity wants to reap the benefits of paying interest and yield, it should apply for a bank charter and follow the same rules, he said: Stablecoins aren’t “supposed to be a bank deposit product, a substitute for bank savings. ... We’re not afraid of technology. If something can facilitate faster payments, we’ve always adopted faster payment technologies. But don’t disguise your technology in a way where you’re becoming a bank and not falling under the same banking rules and regulations.”The Bank Policy Institute opposed the Clarity Act over the yield provisions and loopholes related to anti-money laundering requirements. BPI Executive Vice President Paige Paridon said bankers have significant obligations under rules related to know-your-customer, and Suspicious Activity Report filings, among numerous other requirements. Many of these requirements are congressionally mandated in order to ensure the safety of the financial system, she said: “Banks have the ability to track and process funds, and they provide a significant amount of valuable information to law enforcement to help combat crime, detect money laundering and other illicit finance.”“We don’t have opposition to the Clarity Act in its construct of creating market structure,” said Denton. “Our focus has been the yield provision and clarifying that Genius applies to third-party entities from the yield prohibition standpoint.” The compromise language from Tillis and Alsobrooks didn’t “address our concern” and didn’t provide a “strict yield prohibition,” he said. Without those concerns addressed, he said it’s going to be very difficult to pass legislation, given the unified opposition from national banking associations.“There was a growing number of senators concerned with the displacement of deposits and what that would mean for communities, particularly rural communities where those deposits are turned around and used for local lending,” Merski said. “Unless this prohibition is dealt with in a robust way, it’s going to be very difficult for this legislation to advance. The more the senators learned about this issue, the more they expressed their concerns with advancing the legislation.”The Minnesota Bankers Association said in a statement that many banks remain in the “exploratory phase” when it comes to digital assets and Clarity Act implications. Senior Government Relations Manager Therese Kuvaas said, “At this point, we’re continuing to monitor the legislation and the broader regulatory discussions.” Legislation versus federal agency actionWhile Denton said federal regulatory action from agencies like the SEC and CFTC will be helpful, the “cleanest and easiest” way to address the yield issue is through statutory language passed by Congress. The Clarity Act’s market structure goals aren’t a “point of contention,” he said. But amending the yield provision is “critically important.”Gregg believes there’s an opportunity for the OCC, the lead regulator on stablecoin issues, to provide clarity and extend the Genius Act ban to the entire marketplace. It’s “less satisfying” than Congress addressing it through statute, but it’s one path forward if there’s no congressional movement, he said.Merski said the yield provision should have never been so “complicated.” There were several White House and Senate meetings on the legislation, he said: All that was needed was a “few sentences in the statute” expanding the Genius Act prohibition.House Financial Services Committee Chairman French Hill, R-Ark., the lower chamber author, said the Senate result doesn’t change the need for Congress to enact “clear rules of the road for the digital asset ecosystem. Only Congress can provide the lasting legal certainty that consumers and businesses need to participate in these markets with confidence and necessary protections.”Gregg said the Iowa Bankers Association still believes in the need to establish market structure for digital assets. It’s the best way to address yield payment loopholes, he said.“If you displace deposits in local communities, that’s money that’s not available for lending,” said Merski. “And the crypto companies are not going to be lending in those communities. So that was one of the major concerns that really gave members of the Senate concern with advancing that legislation.” Karl Herchenroeder is a contributing writer for BankBeat and BankNews.com