US Banks Target CLARITY Act Stablecoin Rewards in Fight Over Deposit Flight

A coalition of 78 banking groups, led by the American Bankers Association, is urging lawmakers to tighten the CLARITY Act by restricting how payment stablecoin issuers can reward users.

In a letter sent to Senate leaders ahead of a July 17 hearing, the groups proposed amendments to Section 404 of the bill, which governs stablecoin rewards.

The proposals focus on limiting mechanisms that banks argue could make payment stablecoins function more like deposit products.

Just released - ABA, @ICBA join state associations in urging Senate to strengthen stablecoin yield provisions in Clarity Act: https://t.co/t9fYw7RqAL

Closing the Yield Loophole

The current draft of the CLARITY Act prohibits returns paid “solely” for holding stablecoins. Banking groups argue that this wording leaves room for issuers and platforms to structure rewards that differ legally but produce a similar economic outcome.

They want lawmakers to remove the word “solely,” making it more difficult to combine holding-based rewards with activity-based incentives.

The groups also propose replacing the current “economically or functionally equivalent” test with a stricter “substantially similar” standard.

Banking groups are also seeking to narrow provisions that preserve certain platform-based rewards. They argue that stablecoin products offering passive returns begin to compete directly with deposit accounts.

The Deposit Flight Debate

Banking groups argue that widespread stablecoin rewards could encourage funds to move out of deposit accounts and into stablecoin products. They warn that lower deposit balances could reduce funding available for mortgages, small-business lending and agricultural credit.

“We remain concerned that ambiguities within the bill could encourage stablecoin arrangements to effectively function as substitutes for deposits,” the groups wrote.

The proposed amendments could materially affect how regulated stablecoin products are designed. If adopted, the changes would make it harder for regulated issuers such as Circle or Paxos to offer yield-like rewards that compete with offshore crypto platforms..

The proposals would also place greater emphasis on stablecoins as payment and settlement infrastructure, with revenue increasingly tied to payments, transfers, integrations and reserve management rather than user-facing rewards.

The amendments are now part of a broader debate over the CLARITY Act alongside market structure and oversight provisions. The outcome will help determine how payment stablecoins are permitted to compete with traditional deposit products under the final legislation.