Proposed language in the Clarity Act giving regulators a short time frame to decide whether to close the stablecoin payment-of-interest loophole is no safeguard against the deposit flight that would harm many community banks, the American Bankers Association and a coalition of banking trade associations said.
Senate Republicans today released a new draft of the Clarity Act as a possible compromise to gain the 60 votes the bill needs to avoid a filibuster. One proposed change – dubbed a “regulatory circuit breaker ” – would direct the Treasury Secretary to determine within 18 months of passage of the bill whether failing to close the loophole has led to “substantial detrimental impact” for community banks, defined as institutions with less than $10 billion in assets. If the answer is yes, then the banking agencies must promulgate regulations to close the loophole.
In a joint letter, the associations said the current draft “provides loopholes and avenues for the prohibition to be easily evaded that would still allow interest and interest-like payments to be made on stablecoin balances.” They also said the inclusion of the circuit breaker is an acknowledgment that failing to close the loophole could threaten credit availability, leading to broader economic consequences.
“However, a circuit breaker that activates only after substantial deposit flight has already occurred is not a safeguard at all,” they said. “Congress should address this risk upfront by ensuring the Clarity Act prohibits payment stablecoin rewards and incentives that function like deposit interest, rather than waiting for harm to banks, borrowers and communities before regulators are empowered to respond. Further technical refinements are needed to ensure that the text clearly and directly prohibits interest-like payments on payment stablecoins.”
The associations offered targeted, small amendments to ensure the prohibition on paying interest or yield on payment stablecoins is upheld.
With the targeted changes, “we believe that this innovation can be pursued while also protecting the ability of banks to continue providing credit for America’s consumers, small businesses and communities,” they said.
