There are renewed efforts from certain banking lobbies to reopen what was a closed issue reached through bipartisan compromise on stablecoin rewards in the Clarity Act. Opponents warn that rewards on stablecoins will prompt Americans to withdraw trillions of dollars from community banks, lending will collapse, and Main Street will pay the price.
In the year since the GENIUS Act, we have seen the opposite effect. Stablecoin adoption has surged while bank deposits have grown. Academic research finds that reasonable stablecoin rewards help banks compete by paying depositors more without reducing aggregate lending. As discussed below, academic research from Cornell, the White House, and Galaxy Research all found that the rise of U.S. dollar-denominated stablecoins also increases deposits in U.S. financial institutions of all sizes. Stablecoins also do not mechanically remove dollars from banks: GENIUS requires permitted payment stablecoins to hold qualifying reserves, including bank deposits, while substantial stablecoin demand comes from foreign users whose dollars were never held at U.S. community banks.
Meanwhile, the largest banks are building tokenized deposits that can compete directly for deposits now held by community banks. A dollar converted into a stablecoin may remain in or return to the banking system through reserves. A dollar moved from a community bank into a money-center bank’s tokenized deposit is more direct: the smaller bank loses the deposit, and the larger bank gains it. The debate should therefore focus on evidence and competition, not the most alarming hypothetical which has virtually zero empirical support.
Background on CLARITY Act Stablecoin Rewards Text
The current version of the Clarity Act, which the Senate will consider in mid-September, substantially restricts stablecoin yield. Specifically, Section 10404 provides a “Prohibiting Interest and Yield on Payment Stablecoins,” and bars a covered party from directly or indirectly paying interest or yield to a U.S. customer solely for holding payment stablecoins or on a stablecoin balance in a manner “economically or functionally equivalent” to interest on an interest-bearing bank deposit.1
Clarity tightens regulation on digital asset service providers and affiliates, addressing the purported intermediary “loophole” identified by banking organizations while preserving transaction-based rewards that are not equivalent to deposit interest. This bipartisan compromise, led by Senators Alsobrooks and Tillis after months of negotiations, allowed all stakeholders to participate and provide input. Banks, credit cards, and payment platforms routinely use transaction-based rewards. Stablecoins should not uniquely be prevented from competing the same way.
The Overwhelming Weight of Academic Authority Rebuts Deposit Flight Narrative
In an attempt to further restrict how Americans can use their stablecoins, banking groups routinely assert that $6.6 trillion in deposits could be at risk if stablecoin holders receive yield or rewards “drain deposits” and constrict community lending. That is not an empirical forecast of actual deposit flight, but is instead the number of total U.S. domestic deposits.2 The number of domestic deposits at U.S. banking institutions would need to go to zero for that number to be relevant.
What is relevant is what empirically happens in our banking system when somebody replaces a fiat dollar with a stablecoin dollar. Galaxy Research analyzed likely stablecoin funding sources, and concluded only roughly 30% to 40% of incremental stablecoin funding is likely to come from U.S. bank deposits. $100 of new stablecoin issuance generates approximately $32 of additional U.S. credit, producing about $400 billion in additional credit through 2030.3 That is fundamentally different from assuming every dollar entering a stablecoin is a one-to-one dollar disappearing from a bank because the majority of stablecoin funding is likely to come from offshore demand, physical currency, money-market funds, and other sources.4
Professor Lin William Cong’s Cornell-affiliated research reaches a similar conclusion. Stablecoins do not mechanically drain deposits. A competitive outside option can instead cause banks to raise deposit rates to retain customers, attracting deposits and increasing lending.5 Bank Policy Institute’s public commentary characterized Professor Cong’s research as evidence that yield-bearing stablecoins could destroy deposits. Professor Cong rejected that interpretation, explaining that the model expressly contains a “competition-dominant” region in which greater stablecoin attractiveness raises deposit rates, deposits, lending, and consumer welfare.6
Recent history reinforces the difference between deposit reallocation and credit destruction. During the 2022-23 tightening cycle, deposits moved from rate-insensitive institutions toward rate-responsive digital banks. Those receiving banks expanded lending while aggregate credit supply remained broadly stable.
Finally, the White House commissioned a study into the issue conducted by the White House Council of Economic Advisers, which tested the banking industry’s argument directly and released its findings in April 2026.7 Its baseline estimate found that eliminating stablecoin yield would increase total bank lending by only $2.1 billion, or 0.02%, while imposing approximately $800 million in welfare costs. Community banks would receive only about $500 million of additional lending, roughly 0.026%.
Even after stacking highly adverse assumptions, there is little-to-no evidence for the claim that permitting stablecoins to earn yield like any other asset has a negative effect on community bank deposits. All available empirical studies instead found that adoption of U.S. dollar stablecoins actually increases deposits across the banking system.
The Bigger Community-Bank Threat: Tokenized Deposits
The banking industry’s position also contains an important inconsistency. The nation’s largest banks are currently building digital products to compete for deposits currently held at community banks.
In June 2026, The Clearing House announced a bank-led on-chain money initiative backed by major financial institutions to enable 24/7 clearing and settlement of tokenized commercial-bank deposits across blockchain networks.8 The Digital Chamber strongly supports banks using blockchain technology, including tokenized deposits, and The Clearing House says its network is intended to be accessible to banks of all sizes. But community banks still need the technology, compliance resources, integrations, and customer reach to compete. Large banks already operate tokenized-deposit platforms and possess obvious advantages in deploying them at scale.
The distinction matters. When a consumer purchases a stablecoin, the deposit liability may shift to the issuer’s banking relationships, and aggregate deposits depend on how reserves are allocated. Restricting stablecoin rewards while permitting large banks to compete through interest-bearing tokenized deposits therefore does not protect community banks from digital competition. It simply determines who wins it.
notes:
[1] Digital Asset Market Clarity Act, H.R. 3633, 119th Cong. § 10404(b)-(c) (Lummis Substitute, EHF26654, July 22, 2026) (prohibiting covered parties from paying interest or yield solely in connection with holding payment stablecoins or in a manner economically or functionally equivalent to interest or yield on an interest-bearing bank deposit, while permitting rewards and incentives based on bona fide activities or transactions that are not economically or functionally equivalent to such deposit interest).
[2] American Bankers Association, Bank Policy Institute, Consumer Bankers Association, Financial Services Forum & Independent Community Bankers of America, Closing the Payment of Interest Loophole for Stablecoins (Aug. 12, 2025) (arguing that stablecoins could produce as much as $6.6 trillion in deposit outflows if interest or yield is available).
[3] Thaddeus Pinakiewicz, Stablecoins, the GENIUS Act, and the Evolving Structure of Dollar Finance, Galaxy Research (May 7, 2026).
[4] See also Lin William Cong, Stablecoins and Banking: Deposit Dynamics, Financial Stability, and Regulatory Design (Dec. 7, 2025, appendix added Jan. 30, 2026). The paper concludes that existing evidence does not show meaningful aggregate deposit outflows attributable to stablecoin adoption and that, under realistic yield conditions, stablecoin competition can encourage more competitive deposit pricing and more efficient liquidity allocation.
[5] Cong, supra note 4. Cong’s model treats stablecoins as a competitive outside option. As their attractiveness increases, banks can respond by increasing deposit rates, thereby attracting deposits and expanding lending and intermediation. Under Cong’s updated calibration, moderate stablecoin yields of approximately 4% to 6% can increase deposit-market competition and expand credit intermediation. Contraction emerges only above roughly 6%, materially above returns available from the short-duration assets backing regulated stablecoins and therefore difficult to sustain economically.
[6] Cong, supra note 4, app. at 32-36. Responding to commentary criticizing the paper, Cong expressly rejects the characterization that meaningful stablecoin adoption necessarily reduces deposits and lending. He explains that the model contains a competition-dominant region in which increased stablecoin attractiveness increases deposit rates, deposits, lending, and consumer welfare.
[7] Council of Economic Advisers, Effects of Stablecoin Yield Prohibition on Bank Lending (Apr. 8, 2026).
[8] The Clearing House, Major Financial Institutions Unveil Bank-Led On-Chain Money Initiative (June 5, 2026) (announcing a bank-led initiative for on-chain clearing and settlement of tokenized commercial bank deposits, including 24/7 settlement and connectivity between blockchain networks and traditional payment rails). See also J.P. Morgan, Deposit Tokens: A Foundation for Stable Digital Money (2026); Citigroup, Citi Achieves Industry First: Integrating Citi Token Services with 24/7 USD Clearing for Real-Time Cross-Border Payments and Liquidity Management (Sept. 29, 2025).
