One of the most consequential digital asset policy debates isn't about Bitcoin—it's about whether stablecoins can pay yield. Banks warn it could drain $6.6 trillion in deposits. Crypto platforms call it competitive suppression. A White House mediation ended without agreement. For treasuries exploring digital assets, the outcome will reshape available options. Here's the conflict-free analysis your team needs.
The Legislative Landscape
What the GENIUS Act Actually Says
When President Trump signed the GENIUS Act on July 18, 2025, it created America's first federal stablecoin framework. Section 4(a)(11) contains the provision at the center of today's debate:
Stablecoin issuers are prohibited from paying holders "any form of interest or yield (whether in cash, tokens, or other consideration) solely in connection with the holding, use, or retention of such payment stablecoin."
The intent was clear: stablecoins should function as payment instruments, not savings vehicles. The policy rationale—preventing deposit flight from the banking system—resonated with regulators and legislators.
But the law left a gap.
The "Affiliate Loophole"
The GENIUS Act prohibits issuers from paying yield directly. It does not explicitly prohibit exchanges, custodians, or affiliated third parties from offering yield funded indirectly by the issuer.
This is how Coinbase currently offers 4.1% APY on USDC holdings (4.5% for Coinbase One subscribers). Circle doesn't pay the yield directly—Coinbase does, funded by interest earned on reserves.
Whether this arrangement honors the spirit of the law or circumvents Congressional intent is now the central question.
Enter the CLARITY Act, Section 404
On January 12, 2026, the Senate Banking Committee released an updated draft of the Digital Asset Market Clarity Act. Section 404 attempts to close the affiliate loophole:
Digital asset service providers are prohibited from paying any form of interest or yield "solely in connection with the holding of a payment stablecoin."
If enacted, Section 404 would extend the yield ban beyond issuers to include exchanges like Coinbase, Kraken, and Crypto.com—and their affiliates.
Key Dates in the Stablecoin Yield Debate
The Battle Lines
The Banking Industry's Position
The American Bankers Association has mobilized aggressively. On January 5, 2026, the Community Bankers Council sent a letter to the Senate signed by more than 200 community bank leaders. A follow-up letter on January 14 carried 3,200+ banker signatures.
Their argument: allowing stablecoin-related entities to offer yield would "siphon deposits away from community banks, undermining their ability to provide relationship-based lending to small businesses, farmers, and households."
The letter warns that without stronger legislative clarity, up to $6.6 trillion in deposits could be at risk—a figure drawn from a U.S. Treasury report.
Standard Chartered estimates are even more dramatic: unrestricted stablecoin yields could drain $500 billion from developed economies and up to $1 trillion from emerging markets by 2028.
The Crypto Industry's Position
The Blockchain Association counters with a letter signed by 125+ crypto industry players. Their arguments:
- Legislative Intent: Congress deliberately preserved third-party rewards in the GENIUS Act as a negotiated compromise. Section 404 would "reopen a settled law."
- Systemic Risk Claims Are Overstated: The Blockchain Association cites "independent analysis" showing no disproportionate deposit outflows tied to stablecoin adoption, though the specific study was not named in their letter. They note that banks currently hold trillions in reserves earning interest at the Federal Reserve rather than being deployed into loans.
- Competition, Not Stability: The real motivation, they argue, is competitive suppression—banks protecting deposits, not financial stability.
Coinbase's Dramatic Exit
On January 14, 2026—the night before a scheduled Senate Banking Committee markup—Coinbase CEO Brian Armstrong withdrew the company's support for the CLARITY Act.
His statement: "We'd rather have no bill than a bad bill."
The stakes for Coinbase are substantial. Stablecoin-related revenue was $355 million in Q3 2025 alone—roughly 20% of the company's total revenue. Most of USDC's recent growth has occurred on Coinbase's platform.
The White House reportedly called the withdrawal a "rug pull." A16z crypto's Chris Dixon publicly disagreed with Coinbase's decision.
The White House Intervention
On February 2, 2026, Patrick Witt, Executive Director of the President's Council of Advisers on Digital Assets, convened a mediation in the White House Diplomatic Reception Room.
For over two hours, representatives from Coinbase, Circle, Ripple, Crypto.com, and Kraken faced off against the American Bankers Association, the Independent Community Bankers of America, the Bank Policy Institute, and the Financial Services Forum.
The outcome: no agreement. Both sides must now submit a joint formulation on stablecoin yield by the end of February.
One participant called the discussion "exactly the kind of progress needed." Banking representatives presented no compromises.
The Central Question: Should stablecoin yield be treated as a competitive threat to the banking system requiring legislative prohibition, or as a legitimate financial innovation that enhances consumer choice? The answer will shape digital asset regulation for years to come.
The Institutional Perspective: Why This Matters for Your Treasury
Current Market Context
The stablecoin market has reached $317.94 billion:
- USDT (Tether): $187 billion (60.68% market share)
- USDC (Circle): $75.7 billion
- Others: ~$55 billion combined
Institutional adoption is accelerating, though most corporate treasuries have not yet deployed stablecoin yield programs. However, for those evaluating digital assets or monitoring competitive dynamics, this debate sets important precedents that will affect future options.
Three Scenarios for Treasury Executives
Treasury Decision Framework: Three Scenarios
| Scenario | What Happens | Treasury Implication |
|---|---|---|
| Section 404 Passes | Third-party yield programs end; stablecoins become pure payment instruments | Evaluate stablecoins for payment efficiency, not yield |
| Section 404 Fails/Compromise | Yield programs continue (potentially with guardrails); stablecoins compete with MMFs | Evaluate for both efficiency and yield optimization |
| Prolonged Uncertainty | No resolution before 2026 midterms; Citi notes possible delay beyond 2026 | Proceed cautiously; focus on platforms with clear regulatory standing |
Questions for Your Next Treasury Meeting
- Counterparty Evaluation: What is your stablecoin custodian's regulatory strategy if Section 404 passes?
- Yield Dependency: If you're using stablecoin yield programs, what's your contingency if they're discontinued?
- Payment vs. Investment: Are you using stablecoins primarily for payment efficiency or yield optimization? Does your strategy need to change?
- Regulatory Standing: Which stablecoin issuers have obtained (or are pursuing) OCC charters or state licenses?
The Fee-Only Perspective
Most analysis on this topic comes from parties with financial interests:
- Coinbase: 20% of revenue from stablecoin-related activities
- Circle: USDC issuer with direct stake in platform distribution
- Banks: protecting deposit bases and lending capacity
- Crypto trade groups: funded by member platforms
GSC has no platform revenue sharing. We have no stablecoin holdings. We receive no affiliate fees from any exchange. Our analysis is informed only by what serves institutional client interests.
Full disclosure: GSC does benefit from regulatory complexity—uncertain markets create demand for advisory services. This analysis reflects our best judgment, informed by a business model that aligns our interests with client outcomes rather than platform adoption.
The uncomfortable truth both sides avoid: this isn't purely about financial stability or innovation. It's about who captures the billions in annual stablecoin-related revenue—and whether that capture helps or harms the clients we serve. (For context: Coinbase alone earned $355 million from stablecoin activities in Q3 2025; extrapolated across the industry, the stakes are substantial.)
Key Takeaways
- The GENIUS Act banned issuer-paid yield. The CLARITY Act's Section 404 would extend that ban to exchanges and affiliates.
- Both sides have concerns worth understanding. Banks worry about deposit flight; crypto platforms worry about competitive suppression. The evidence supporting each claim varies in strength—evaluate carefully.
- The Treasury implications are real. If you're using stablecoin yield programs, have a contingency plan.
- Regulatory clarity may not come soon. Plan for multiple scenarios.
- Independent analysis matters. On this topic more than most, consider the source's financial interests.
Navigate the Regulatory Landscape
GSC provides fee-only, fiduciary advisory on institutional digital asset strategy. We have no platform affiliations, no stablecoin holdings, and no financial interest in the outcome of this debate.
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