- Senator Tillis and Senator Alsobrooks finalized the CLARITY Act language that prohibits bank interest rates on stablecoins and maintains rewards based on actual on-chain usage.
- The disagreement closes the path of the GENIUS Act, responding to the fear of flight in the bank, although the assessment of the White House is that the lending could be as low as 0.02%.
- Platforms can still handle payments, transfers, trading, and staking, but the “stay and earn” stablecoin savings-account model is dead for US customers.
The era of getting high yields just by letting stablecoins sit in an exchange wallet may be over. In a move that has sparked controversy over the digital economy, Senators Thom Tillis (R-NC) and Angela Alsobrooks (D-MD) have finalized a deal. Section 404 about the CLARITY Act last Friday. This new language effectively bridges the “Great Wall” between traditional bank interest rates and crypto reward programs.
Section 404 Damages
At its core, Section 404 is designed to block what is known as “shadow banking”. This rule draws a definite line in the sand: you can get rewards for using crypto or stablecoins, but not for owning them.
Under the new term, “covered parties”—which include almost all digital service providers in the US—are prohibited from providing any interest or yield to customers in two situations:
- About owning stablecoins: The “sit and earn” model is dead.
- In any way that is similar to money or a service similar to bank interest: If it looks like a savings account and acts like a savings account, it is illegal to exchange crypto.
In simple terms, the crypto platform can no longer function as a high yield storage competitor. The decision is unsettling for crypto exchanges but it is a victory for financial institutions that have spent the past two years seeing billions of dollars in savings move to the more visible crypto ecosystem.
Closing the “GENIUS” Loophole
To understand why Section 404 is arriving now, we need to look back at the GENIUS Act, signed into law by President Trump on July 18, 2025. The GENIUS Act established the first federal regulation for stablecoin issuersit left a wasteland. They banned stablecoins donors (such as Circle or Paxos) to not pay interest, but it was silent on what exchange (like Coinbase or Kraken) can do with their reward programs.
Banks were quick to sound the alarm. They argued that if Coinbase could pass the yield to customers when banks were tied to fractionally-reserved capital requirements, it created an un-level playing field. Section 404 is a direct response to this persuasive work, of course “Writing” GENIUS Act’s to supervise.
“Deposit Flight” problem.
The reason for this disagreement is the fear of “deposit flight.” Traditional banks rely on low-cost deposits to support their lending operations. When users move money to USDC to chase the 6% yield on the exchange, that money leaves traditional banks, which can strengthen credit and raise the cost of credit for everyday Americans.
Senators Tillis and Alsobrooks were remarkably clear about this in their joint statement:
to“We have been working with all stakeholders to address bank concerns about deposit flight. Our agreement prevents the stablecoin reward from matching the interest rate on bank deposits, our main concern for deposit broadcasts.”
However, not everyone agrees that the risk was as dire as the banks say. A the latest White House report from the Council of Economic Advisers found that banning stablecoin issuance would only increase bank lending by 0.02%. Other experts, such as Nic Puckrin of the Coin Bureau, have also argued that The bank’s charge for blocking issuance has dropped significantly in the face of this data. However, politics often move faster than economic white papers, and the “deposit flight” issue was strong enough to include section 404 in the final bill.
Winners, Losers, and “Practical” Loopholes for Stablecoin Holders & Issuers
The new regulation established by Section 404 creates a more stable financial system, where established players find a way to grow while speculative businesses face a major challenge. Traditional banks seem to be the “winners” of late, reclaiming their power over interest rates, reducing a major source of competition for depositors.
At the same time, industry giants such as Coinbase and Circle have accepted the deal as a pragmatic business. By giving up the ability to provide simple, attractive products, they have solved the problem of making laws. repeal the CLARITY Act from the Senate Banking Committee markup, which is here directed to week of May 11, 2026.
Coinbase CEO Brian Armstrong expressed his approval of X in a brief “Mark it,” while Chief Policy Officer Faryar Shirzad he realized that the agreement “protected what is important – the ability of the American people to receive rewards based on actual consumption.” “Actual use” refers to the “Practice Damages” defined in Section 404, which allow awards linked to actual transactions such as payments, transfers, sales, and deposits.
Conversely, the “losers” in this new regime are small crypto exchanges that rely on high-yield “mouses” to find users, and many American consumers who see stablecoins as an inflation-protected alternative to traditional currencies. These companies are now forced to stop doing things like a banking system and a way in which value is created using real needs, and end the time to chase business productivity.
The Market Respectfully Agrees to Disagree
The reaction from the financial world has been a mixture of relief and resignation. Bank of America analyst Ebrahim H. Poonawala described the decision as a “Good results in all banks,” recognizing that it removes a huge cloud of uncertainty for banks that want to participate in the digital economy.
On the crypto side, the idea is one of intellectual acceptance. Journalist Eleanor Terrett said that the lawmakers’ comments indicate that the agreement is final, despite some complaints from banking trade groups that want the ban to be stricter. Is the separation of senators shooting the banks? “We respectfully disagree.”
Plumbing Replacement
The Section 404 compromise represents a significant change in the crypto landscape. We’re moving away from the “DeFi Summer” of chasing triple-digit yields and into the “Utility Spring,” where fixed income is seen as a financial upgrade rather than a direct competitor to the local bank.
By eliminating the “usury” interest rate, the CLARITY Act forces companies to justify their costs through prompt payments, low shipping costs, and corporate transparency. As the Senate Banking Committee prepares for its May deposition, the message is clear: Crypto is welcome to enter the House, but it must abide by the rules of the neighborhood.
