The CLARITY Act Deal - What a Compromise on Stablecoin Yield Means for Crypto

The US Senate has progressed after months of inaction, defining key crypto legislation as part of the CLARITY act. On May 1, Senators Thom Tillis and Angela Alsobrooks announced a compromise on the act that had held the deal up previously. 

The compromise is around stablecoin yields, which had previously collapsed the Senate Banking Committee negotiations. This new development draws a fine line between distinct types of yield, which we believe will reshape the state of stablecoins in the U.S. market.

Defining Yield - Passive vs Active Yield

The new proposal clearly defines the difference between active, or activity based yields and passive yields for stablecoins. The new text states, crypto platforms are prohibited from offering rewards that are “economically or functionally equivalent” to interest on a bank deposit. This means that you cannot receive yield or income from simply holding a stablecoin in a wallet. In the case that such passive yield is present, the asset must be classified and regulated as a deposit product. 

Compensation that is directly tied to on-chain participation however, is now permitted. This includes liquidity provisioning for market makers, trading competition incentives and staking. When you are actively posting collateral, contributing to the function of a protocol or providing two-sided liquidity, yield rewards are permitted.

The Debate - What Defines a Deposit Product

Institutional TradFi Firms such as banks have actively lobbied against passive yield, arguing that if users can earn 4-6% via a stablecoin platform on USDC, it is effectively a savings account. This mitigates the need of using a traditional bank with the associated fees and regulation. 

The Independent Community of Bankers of America (ICBA) fears this would cause an estimated $1.30 trillion in outflows from community banks alone. 

The concern of the ICBA is clear: community banks fund small business loans, local credit and mortgages, a large outflow of retail deposits could lead to a bank run devastating local markets. The yield-bearing passive stablecoin is directly competing with bank accounts without the regulatory scrutiny of bank laws, an issue the TradFi lobbies refuse to compromise on.

The following yields are now codified under the proposed regulation:

• Passive yield for holding a stablecoin - banned as deposit equivalent ❌

• Transaction-based rewards tied to trading activity - permitted ✅

• Liquidity provision rewards for market makers - permitted ✅

• Staking incentives for active network participation - permitted ✅

• Collateral posting rewards - permitted under activity-based framework ✅

Market Reaction

Following the news around stablecoin yield, the market responded positively with Bitcoin touching its 3-month high above $80,000. Publicly traded exchanges, digital asset treasuries (DAO) and crypto firms such as Coinbase, Microstrategy and Marathon Digital all saw increased stock prices. The message from the market is clear. Further clarity on regulation, even when it requires compromise, is better than prolonged periods of uncertainty.

Following the announcement, Coinbase CEO Brian Armstrong and Circle's Dante Disparte have both been vocal in their support, a stark contrast to earlier pushback from industry leaders, who had preferred zero restrictions. The Crypto Council for Innovation noted the new language is tighter than previous versions as seen in the GENIUS Act, but still urges for the bill to pass, instead of risking no further federal frameworks until 2030.

The CLARITY Act aims to also resolve the jurisdictional conflict between the SEC and CFTC over the classification of digital assets. Addressing core legislation on both spot and derivatives markets, the industry is eager to see CLARITY pass sooner rather than later, even at the cost of yield restrictions.

Concluding Remarks

The current outcome is workable for both parties across the TradFi and DeFi gap. The line between passive yield and usage-based rewards is a fair distinction which the market already makes implicitly. LP rewards, rebates on volume and staking all serve different functions than a deposit rate for both retail investors, market makers and other active members. Codifying that difference in law is not unreasonable and will help promote clear and stable growth in the future. We see the enforcement and interpretation of these laws to be the real challenge moving forwards. "Economically or functionally equivalent to interest" is a phrase that will keep being debated. How regulators apply that standard to on-chain mechanics particularly in automated market-making and lending protocols will matter enormously for product design.

For now we see a new and clear direction. The U.S. is making progress toward a stablecoin framework with broad industry acceptance. A large obstacle has been clear, and now it remains to see whether the bill can clear the legislative calendar.