The CLARITY Act’s Last-Minute Stall Sparks a Fierce Debate

What is the CLARITY Act?

Understanding the Digital Asset Market Clarity Act in Simple Terms

The CLARITY Act, formally known as the Digital Asset Market Clarity Act, is a proposed U.S. bill designed to bring long-overdue legal clarity to the cryptocurrency and digital asset industry.

For years, crypto in the United States has operated in a legal gray zone. Regulators disagree, enforcement actions appear inconsistent, and builders often don’t know whether they are complying with the law until they are sued. The CLARITY Act aims to change that.

At its core, this bill answers one fundamental question:

Who regulates crypto — and under what rules?

Why the CLARITY Act Exists

Today, U.S. crypto regulation is fragmented:

• The SEC often treats tokens as securities.
• The CFTC argues that many tokens function as commodities.
• Projects, investors, and exchanges are left guessing which rules apply.

This uncertainty discourages innovation, pushes startups offshore, and creates unnecessary risk for both developers and users.

The CLARITY Act was introduced to eliminate this ambiguity by establishing a clear regulatory framework for digital assets.

Key Objectives of the CLARITY Act

Clear Regulatory Jurisdiction

The bill draws a firm line between regulators:

• Digital securities fall under the authority of the SEC
• Digital commodities are regulated by the CFTC

Instead of overlapping claims and retroactive enforcement, each asset category has a defined regulator.

Defining Decentralization

One of the most important contributions of the CLARITY Act is its attempt to legally define decentralization.

• Assets that are sufficiently decentralized may not be classified as securities
• Assets that remain under centralized control may still fall under securities law

This moves regulation away from subjective interpretation and toward measurable criteria.

Supporting Innovation and Developers

The bill recognizes that decentralization is a process, not a starting point.

• Early-stage projects are allowed to grow and decentralize over time
• Developers are not immediately punished for launching experimental networks
• Legitimate innovation is protected rather than discouraged

This is especially important for startups building new blockchain infrastructure.

Strengthening Investor Protection

Clarity benefits not only builders but also users:

• Clear disclosures
• Reduced regulatory arbitrage
• Fewer “rule-by-enforcement” surprises

A predictable legal environment makes it easier to identify bad actors and protect investors.

Why the Crypto Industry Cares

If passed, the CLARITY Act would mark one of the most significant regulatory shifts in U.S. crypto history.

Potential outcomes include:

• Increased confidence from institutional investors
• Reduced legal risk for exchanges and developers
• Slower capital flight to overseas jurisdictions
• A foundation for long-term industry growth in the U.S.

Importantly, the bill is not inherently bullish because of price action — it is bullish because it allows the industry to exist and operate legitimately.

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The CLARITY Act Controversy

As the CLARITY Act moved closer to final negotiation, an unexpected controversy emerged around a single but highly consequential issue: whether stablecoins should be allowed to offer yield to holders. This debate has exposed deeper tensions between the traditional banking sector and the digital asset industry—tensions that go far beyond regulatory technicalities.

The Core Dispute: Stablecoin Yield

The point of contention centers on whether stablecoin issuers should be permitted to share yield generated from reserve assets with stablecoin holders.

Coinbase CEO Brian Armstrong has publicly argued that last-minute changes to the CLARITY Act were influenced by lobbying from major U.S. banks. According to this view, banks are seeking to block any provision that would allow stablecoins to pay interest, effectively preventing users from moving transactional balances out of the traditional banking system and into crypto wallets.

Banking industry groups, on the other hand, have been firm in their opposition. The American Bankers Association (ABA) has stated that preventing yield-bearing stablecoins is a top legislative priority, and has urged lawmakers to tighten the CLARITY Act to close any potential pathway for stablecoin interest payments.

The Banks’ Argument: Deposit Flight Risk

Senior banking executives have warned that allowing stablecoins to pay yield could lead to massive outflows from commercial bank deposits.

One frequently cited concern is that trillions of dollars in deposits—estimates range up to 30–35% of U.S. commercial bank deposits—could migrate into stablecoins if users are offered comparable functionality plus yield. Such a shift, banks argue, would weaken their lending capacity and destabilize the financial system.

At first glance, this concern appears serious. However, a closer look at how regulated stablecoins operate complicates this narrative.

How Stablecoin Reserves Actually Work

Under existing and proposed U.S. regulations, including provisions outlined in last year’s GENIUS Act, compliant stablecoins must be fully backed by high-quality, liquid assets such as:

• Cash and bank deposits
• Short-term U.S. Treasury bills
• Reserves segregated from the issuer’s operating capital

This structure means that funds backing stablecoins remain within the financial system. They are typically held at banks or invested in government securities, both of which continue to support liquidity, lending, and credit creation.

In other words, stablecoins do not remove money from the financial system—they rearrange who benefits from it.

This raises an important question: if the funds remain in the system, what is the real source of concern?

The Economic Incentive Banks Are Protecting

To understand the resistance, it is necessary to examine how large banks generate profit from transactional deposits.

U.S. banks hold vast amounts of non-interest-bearing or low-interest demand deposits—funds used by customers for everyday payments and transfers. While customers earn little to nothing on these balances, banks can:

• Place reserves at the Federal Reserve earning interest (currently in the mid–single-digit range)
• Use deposits to support lending activities
• Collect significant fees from card payments and transaction processing

Industry data suggests that banks collectively place trillions of dollars in reserves at the Federal Reserve, generating hundreds of billions of dollars in annual interest income, much of it with minimal risk. On top of this, payment processing fees from card networks contribute another substantial revenue stream.

Together, these activities form a highly profitable and historically protected segment of the banking business.

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Why Yield-Bearing Stablecoins Change the Equation

Stablecoins increasingly serve the same functions as bank deposits: payments, transfers, and short-term value storage. As long as they remain non-yielding, they pose limited competitive pressure.

Allowing stablecoins to pay yield fundamentally alters this dynamic.

Users would have a clear incentive to hold funds in stablecoins that offer:

• Payment functionality
• Near-instant settlement
• Transparent reserves
• A share of the yield generated by underlying assets

Although the reserves would still flow back into banks and Treasury markets, banks would lose access to a pool of effectively free capital. They would need to compete by offering higher rates, while simultaneously facing reduced transaction fee revenue as payments migrate to blockchain-based rails.

At Its Core: A Competition for Economic Rents

Viewed through this lens, the conflict surrounding stablecoin yield is less about financial stability and more about who captures the economic surplus.

For decades, large banks have benefited from a closed loop:

• Acquire deposits at near-zero cost
• Earn interest on reserves and lending spreads
• Collect fees on nearly every transaction
• Return little of that value to depositors

Yield-bearing stablecoins threaten to break this loop by redistributing a portion of those returns to users and introducing real competition in payments and money storage.

This is the structural shift that the CLARITY Act debate has brought into focus.

Conclusion

The controversy around the CLARITY Act is not merely a regulatory disagreement—it is a confrontation between two financial models.

One model prioritizes incumbency, centralized control, and rent extraction.
The other emphasizes programmability, competition, and broader distribution of financial returns.

Whether or not stablecoin yield is ultimately permitted, the debate itself signals a critical moment: digital assets are no longer operating at the margins of finance—they are challenging its most profitable foundations.

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