Negotiators brush off bank concerns with stablecoin-yield compromise

• Key insight: Bank trades spent the weekend and beginning of this week pushing back on provisions in the Tillis-Alsobrooks language that they say would allow loopholes for crypto firms to offer yield-like rewards for holding stablecoins on their platforms. 
• What's at stake: Banks have long feared that such arrangements could mimic bank deposits and thus drain deposits from the banking system. 
• Forward look: Banks' concerns, especially those of the largest institutions, could still delay a markup on the crypto bill. 

WASHINGTON — Sens. Thom Tillis, R-N.C., and Angela Alsobrooks, D-Md., dismissed bankers' concerns with their new compromise on stablecoin yield. 

Tillis and Alsobrooks have for months been negotiating between banking and crypto parties on a controversial provision of market-structure legislation that would, to some extent, bar crypto firms from offering yield-like rewards on stablecoins. 

Banks have long feared that such arrangements could mimic bank deposits and thus drain deposits from the banking system. Crypto firms, for their part, worry that prohibiting the rewards entirely will undermine their fledgling business model. 

Under the lawmakers' newest text, made public at the end of last week, crypto firms would not be able to issue rewards for stablecoin balances that are "economically or functionally equivalent" to an interest-bearing bank deposit.

While executives at Coinbase, a prolific donator to campaigns in the last election season and one of the most active firms on this issue, posted immediately in favor of this language, banks have spent the weekend and the beginning of this week pushing back on the provision, according to three people familiar with negotiations. 

"Senators Tillis and Alsobrooks are seeking to achieve the correct policy goal – prohibiting the payment of yield and interest on stablecoins; however, the proposed language falls short of that goal," a group of bank trade groups said in a joint statement. 

Tillis and Alsobrooks, in a statement after the bank trades made theirs public, signaled that they would move forward with the language as is. 

"Our compromise also allows crypto companies to offer other forms of customer rewards," the pair of lawmakers said. "Most importantly, it helps put us on a bipartisan path to pass the CLARITY Act, providing the regulatory certainty needed to foster innovation. Some in the banking industry may not want either of these things to happen, and we respectfully agree to disagree."

The group of bank trades included groups that represent a range of institutions across the size spectrum, and includes the American Bankers Association, Bank Policy Institute, Consumer Bankers Association, Financial Services Forum and Independent Community Bankers of America. 

"A united front gives the banking industry more clout in this fight," said TD Cowen analyst Jaret Seiberg in a note. "It is why we believe it's not a foregone conclusion that crypto will win this fight and the banks will lose."

Specifically, the banks said that section 404 in the compromise would allow rewards for participation in a membership program, which could let platforms like Coinbase bypass the prohibition of yield for holding stablecoins passively. The bank also opposed language that would allow rewards based on the duration of stablecoin holdings, which they said would let platforms reward customers for holding stablecoins in their wallets rather than for using them.