The Battle for Stablecoin Interest: Traditional Banking's "Encirclement" and the Crypto Industry's Breakthrough

Original Author: 100y.eth

Original Compilation: Saoirse, Foresight News

Under the GENIUS Act, stablecoin issuers are prohibited from paying interest to stablecoin holders.

However, currently, the Coinbase exchange is offering a 3.35% reward to users holding USDC on its platform. This is possible because the GENIUS Act only prohibits issuers from paying interest and does not impose restrictions on distributors.

Yet, before the relevant U.S. Senate committee reviews the Crypto Market Structure Bill (which aims to systematize cryptocurrency regulation) on January 15th, a debate has fully erupted over "whether the stablecoin interest payment ban should be extended to the distribution level."

Strong Opposition from the Banking Industry

The American Bankers Association (ABA) is the primary group calling for a comprehensive ban on stablecoin interest payments. In a public letter released on January 5th, the association argued that the interest payment prohibition in the GENIUS Act should not only apply to issuers but should also be broadly interpreted and extended to affiliated parties. They are pushing to have this interpretation explicitly written into the Crypto Market Structure Bill.

The Underlying Reasons for the Banking Industry's Firm Opposition

The reasons why the banking industry is determined to completely ban stablecoin interest payments are actually quite simple:

• Fear of bank deposit outflows;
• Reduced deposits mean diminished lending capacity;
• Stablecoins are not protected by Federal Deposit Insurance Corporation (FDIC) insurance.

Ultimately, stablecoins are threatening the stable and highly profitable business model that the banking industry has relied on for decades.

The Crypto Industry's Counterattack

From the perspective of the crypto industry, this move by the banking sector is a major problem. If, due to banking industry lobbying pressure, the Crypto Market Structure Bill expands the scope of the GENIUS Act's restrictions, it would essentially be a backdoor rewrite and narrowing of an already passed law. Unsurprisingly, this has sparked strong opposition from the crypto industry.

Coinbase's Position

Coinbase's Chief Policy Officer, Faryar Shirzad, refuted this, citing relevant research to point out that stablecoins have not caused substantial outflows from bank deposits. He also added new arguments to the debate by referencing news about China's digital yuan paying interest.

Paradigm's Viewpoint

Alexander Grieve, Vice President of Government Affairs at crypto investment firm Paradigm, offered another perspective. He believes that even if interest payments were only allowed for stablecoins used in payment scenarios, it would be equivalent to imposing a "holding tax" on consumers.

What About China and South Korea?

Although China and South Korea have not progressed as quickly as some other Asian countries in terms of cryptocurrency-related policies, both have recently introduced a series of new measures regarding Central Bank Digital Currencies (CBDCs) and stablecoin policies. On the issue of interest payments, the policy differences between the two countries are particularly noteworthy:

The People's Bank of China has decided to pay interest on the digital yuan, treating it the same as ordinary bank deposits, in order to promote its adoption.

South Korea's policy direction is closer to that of the U.S.: prohibiting issuers from paying interest, but not explicitly banning distributors from doing so.

From a macro perspective, China's aggressive policy stance is understandable. The digital yuan is not a private stablecoin but a central bank-issued digital fiat currency. Promoting the digital yuan can both counterbalance the dominance of private platforms like Alipay and WeChat Pay and strengthen the central bank-centric financial system.

Conclusion

New technologies give rise to new industries, and the rise of new industries often threatens traditional ones.

Traditional financial institutions, represented by banks, are facing the irreversible trend of transitioning to the stablecoin era. At this juncture, resisting change does more harm than good; embracing change and exploring new opportunities is the wiser choice.

In fact, even for existing market participants, the stablecoin industry holds significant opportunities. Many banks have already begun proactive initiatives:

• BNY Mellon in the U.S. is developing its business around stablecoin reserve custody;
• Cross River Bank acts as an intermediary for Circle's USDC fiat on-ramp channels via Application Programming Interfaces (APIs);
• JPMorgan Chase is piloting tokenized deposit services.

Major card networks also have vested interests at stake. As on-chain payment volumes continue to grow, the business of traditional card networks may face contraction. However, companies like Visa and Mastercard have not chosen to fight this trend. Instead, they actively support stablecoin payment settlements, seeking new development opportunities in line with the trend.

Asset management firms are also entering the fray. Funds like BlackRock are actively advancing the tokenization of various investment funds.

If the banking industry's lobbying succeeds and a comprehensive ban on stablecoin interest payments is written into the Crypto Market Structure Bill, the crypto industry will suffer a severe blow.

As someone working in the crypto industry, I can only hope that the Crypto Market Structure Bill does not include provisions that would effectively hollow out the GENIUS Act.