US lawmakers revisit stablecoin yields amid deposit flight concerns

The treatment of stablecoin rewards is back in focus as lawmakers raise concerns about potential deposit flight from banks.

On Thursday, during a Senate Banking Committee hearing focused on bank regulators, Sen. Angela Alsobrooks, D-Md., said she and other lawmakers support innovation but have concerns that stablecoin yields resemble a bank-like product.

"Our concern is offering a bank-like product, like a bank deposit, without any of the protections or regulations that accompany that product and what that could mean for future deposit flight," Alsobrooks said. 

The question of how to treat stablecoin rewards and whether platforms can pay users for holding or transacting them has been central to negotiations over a broader crypto market structure bill. The issue was addressed in a stablecoin law known as GENIUS, passed in July, which bars stablecoin issuers from paying direct interest to holders. The law does not prohibit third-party platforms such as Coinbase from offering rewards.

Banks have argued that allowing yields would drain deposits from traditional institutions and hurt community banks. Late last year, the Independent Community Bankers of America released a study finding that allowing platforms to pay yield on stablecoin holdings would "reduce community bank lending by $850 billion due to a $1.3 trillion reduction in the industry’s deposits."

However, crypto firms have said restricting such yields would stifle innovation.  Coinbase's Faryar Shirzad pushed back against the idea of deposit flight and said there is "no meaningful link between stablecoin adoption and deposit flight for community banks, and there’s no reason to believe big banks would fare any worse," in a September blog post. 

Lawmakers need to take the concerns of community banks seriously, Alsobrooks said on Thursday. 

Federal Deposit Insurance Corporation Chair Travis Hill, head of the Office of the Comptroller of the Currency Jonathan Gould, National Credit Union Administration Chair Kyle Hauptman and the Federal Reserve's Vice Chair of Supervision Michelle Bowman responded to lawmakers' questions during the hearing.

Sen. Thom Tillis, R-N.C., said he planned to submit questions to that panel on the risks of deposit flight. "I just need some independent assessment on there for us to be able to move forward," Tillis said. 

The White House has been pushing for a solution to the stablecoin yield issue, hosting meetings over the past month between crypto firms and banks and setting a deadline for the end of this month to reach a resolution.

Deposit risk concerns 

Meanwhile, crypto-friendly Sen. Bernie Moreno, R-Ohio, pressed regulators during the hearing on whether they had "seen massive deposit flight" from banks. Each said they had not. When asked whether offering rewards on stablecoins poses a risk to the banking system, FDIC Chair Travis Hill said banks are performing well.

"I know this is a pending debate before Congress… community banks and large banks will likely continue to serve their customers and their communities well," Hill said. "I don't want to wade into the legislative debate, but banks continue to be performing quite well," he added when pressed.

Senate Banking Committee Tim Scott, R-S.C., chimed in later and countered banks' studies, saying that his staff's research found that deposits increased after GENIUS passed into law and that will continue over the next year following its enactment in July. 

"So the fear of the fear of the deposit flight does not seem to be realized whatsoever," Scott said. 

Writing stablecoin yield rules

The evening before the hearing, the OCC issued a proposal to implement the GENIUS Act, clarifying its jurisdiction for implementing stablecoin rules. 

The OCC said that it will have authority over certain issuers, including subsidiaries of national banks or federal savings associations, federal qualified payment stablecoin issuers, state qualified payment stablecoin issuers, and foreign stablecoin issuers.

Other banking regulators also said they are working to implement GENIUS. 

"Additionally, we will provide clarity regarding the treatment of digital assets to ensure that the banking system is well placed to support digital asset activities," Bowman said on Thursday. "This includes clarity on the permissibility of activities and willingness to provide regulatory feedback on proposed new use cases."