ABA warns stablecoin rewards risk deposit flight before markup

The American Bankers Association is pressing senators to remove provisions in the Clarity Act that would permit crypto firms to offer rewards on payment stablecoins. The group’s president, Rob Nichols, emailed member bank CEOs over the weekend, warning that the current bill would “unnecessarily incentivize the flight of bank deposits into payment stablecoins.” The intervention arrives with the Senate Banking Committee’s markup session scheduled for May 14, following the bill text release earlier this week.

The simple read is that banks are defending their deposit base against a new competitor. The more precise market read is that the fight centers on whether stablecoin issuers can pay anything that resembles interest. If the bill passes with reward language intact, payment stablecoins could offer yields that compete directly with bank savings accounts. That would shift a portion of US bank deposits into stablecoin ecosystems, altering liquidity flows across both traditional and crypto markets.

The ABA’s deposit-flight argument

Nichols’ letter frames stablecoin rewards as a direct threat to bank funding. Banks rely on low-cost deposits to lend. A migration of deposits into stablecoins would raise their funding costs and reduce the pool of lendable capital. The ABA argues this would hurt economic growth and financial stability. The group wants senators to amend the bill so that payment stablecoins cannot offer interest-like rewards.

The mechanism is straightforward. If a stablecoin issuer can pass through yield from its reserve assets – typically short-term Treasuries and cash equivalents – to holders, the stablecoin becomes a yield-bearing instrument. In a rate environment where many bank savings accounts still pay below 1%, a stablecoin offering even 2-3% could attract significant flows. The ABA’s concern is not hypothetical; it reflects the experience of money-market funds during rate-hiking cycles, when deposits shifted rapidly in search of higher yields.

The bill’s current language does not explicitly ban rewards. The ABA wants that changed before the markup. Without an amendment, the group believes the legislation would create a regulatory framework that accelerates disintermediation of banks.

Senator Moreno’s ‘banking cartel’ counter

Ohio Senator Bernie Moreno, a Republican, responded to the ABA’s letter by accusing the banking industry of operating as a “cartel” that has underpaid depositors for decades. Moreno’s statement on Monday framed the lobbying effort as an attempt to preserve a system where banks profit from customer deposits while offering minimal returns. His opposition signals that the reward provision has support among lawmakers who view it as a way to inject competition into deposit markets.

Moreno’s position matters because he sits on the Senate Banking Committee. His pushback suggests the markup will not be a one-sided affair. The committee’s composition includes both crypto-skeptic and crypto-friendly members. The reward provision could survive if enough senators see it as a consumer-choice issue rather than a stability risk.

What the May 14 markup means for crypto liquidity

The markup session is the next concrete catalyst. If the committee advances the bill without stripping the reward language, stablecoin issuers would have a clearer path to offering yield. That could increase demand for stablecoins like USDC and potentially new entrants, expanding the on-chain liquidity pool available for trading, lending, and decentralized finance. Crypto markets would likely interpret that as a positive regulatory signal.

If the ABA succeeds in having the provision removed, stablecoins would remain purely transactional instruments with no yield component. That would limit their appeal relative to bank deposits and keep the current deposit structure intact. The immediate market impact would be muted. The longer-term growth trajectory for stablecoin adoption would be lower.

The markup also carries broader implications for the Clarity Act’s overall chances. The bill aims to create a comprehensive market structure for digital assets. A contentious fight over stablecoin rewards could delay or derail the legislation. Alternatively, a compromise that allows rewards with certain safeguards – such as requiring full reserve backing and disclosure – could emerge.

The next decision point is Thursday’s markup. Traders tracking crypto regulation should watch for any amendments proposed during the session and the committee’s vote on the reward provision. The outcome will set the tone for stablecoin regulation and influence capital flows between traditional banking and crypto markets for years.