Key Points
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Jamie Dimon argues that yield-paying stablecoins will create a “shadow banking” crisis.
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Dimon and the banking lobby will continue to fight the CLARITY Act’s stablecoin rules.
The House of Representatives passed the Digital Asset Market Clarity (CLARITY) Act last July, which establishes a clearer federal framework for digital assets. However, the CLARITY Act remains in limbo in the Senate due to one major roadblock: how to handle stablecoins that pay interest-like rewards. Traditional banks want to ban stablecoin yields to protect their deposits. In contrast, crypto exchanges like Coinbase(NASDAQ: COIN) — which earn revenue by taking a cut of the interest generated from the assets backing those stablecoins — want them permitted.
In early May, Senators Thom Tillis and Angela Alsobrooks finally brokered a compromise: to ban passive stablecoin rewards (earned from just holding the token) but permit activity-based rewards (tied to actual transactions or platform utility). That compromise allowed the Senate to finally draft a new version of the bill that could clear a final vote.
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However, JPMorgan Chase(NYSE: JPM) CEO Jamie Dimon recently warned that any yield-bearing stablecoins providing bank-like returns without comparable capital, liquidity, and capital-protection requirements could create a “shadow banking” crisis. Dimon and major banking trade groups, including the American Bankers Association, are also ramping up their lobbying efforts to completely ban all yield-generating stablecoins.
How will that pressure impact crypto companies?
If that pressure forces the Senate to revise the CLARITY Act to ban all stablecoin yields, two companies could suffer the most: Circle(NYSE: CRCL) and Coinbase(NASDAQ: COIN).
Circle issues USD Coin(CRYPTO: USDC), the most widely used stablecoin in the United States. It generates most of its revenue by collecting interest on the cash and U.S. Treasury bills that it holds to back its minted stablecoins. Coinbase, a founding partner of USDC, retains all of Circle’s interest income on its platform and half of its residual reserve income.
If the revised CLARITY Act bans all stablecoin yields, those tokens will become a lot less appealing than U.S. dollars. As that appeal wanes, Circle will mint fewer USDC tokens, accumulate less cash and Treasuries, and collect less interest. Less of that interest will flow to Coinbase, which will also collect lower fees as its stablecoin trading volumes decline.
The outcome is far from certain
In a recent Fox Business interview, Dimon said about the CLARITY Act’s stance on stablecoin yields: “We’ll fight it. If we lose, we lose, and we’ll live.” Therefore, it’s still unclear how this battle will end — but we’ll likely see some more clashes before Congress breaks for its August recess.
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JPMorgan Chase is an advertising partner of Motley Fool Money. Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool recommends Coinbase Global. The Motley Fool has a disclosure policy.