- Senator Tillis and Senator Albrooks have finalized the CLARITY Act language prohibiting bank-like returns on stablecoins while preserving activity-based rewards for real on-chain use.
- The settlement closes the GENIUS Act loophole, responding to concerns about bank deposit runs, though a White House analysis says the lending impact would be minimal at about 0.02%.
- The platforms are still able to reward payments, transfers, trading, and staking, but the “sit and earn” stablecoin savings account model is effectively dead to US customers.
The era of getting a high percentage of negative returns just by allowing your stablecoins in an exchange wallet may be officially over. In a move that has sparked controversy across the digital assets landscape, Senators Thom Tillis (R-N.C.) and Angela Albrooks (D-Md.) have finalized the settlement text for… Article 404 From the CLARITY Act last Friday. The new language effectively builds a regulatory “great wall” between traditional banking interest and cryptocurrency rewards programs.
Section 404 breakdown
In essence, Section 404 is designed to close the “shadow banking” loophole. The legislation draws a specific line in the sand: You can earn rewards for using your cryptocurrencies or stablecoins, but not just for the sake of having them.
Under the new text, “covered parties” — which include nearly all major U.S. digital asset service providers — are prohibited from paying any form of interest or yield to customers in two specific scenarios:
- Just regarding holding stablecoins: the “sit and earn” model is dead.
- In any way it is economically or functionally equivalent to interest on bank deposits: If it looks and acts like a savings account, it is now illegal to exchange cryptocurrencies.
In simpler terms, the cryptocurrency platform can no longer act as a competitor to high-yield savings accounts. The decision upsets cryptocurrency exchanges but is a win for traditional financial institutions that have spent the past two years watching billions in deposits migrate toward the more attractive rates of the cryptocurrency ecosystem.
Closing the “genius” loophole.
To understand why Section 404 is here now, we have to look to the GENIUS Act, which President Trump signed into law on July 18, 2025. The GENIUS Act created the first federal framework for stablecoin issuersIt left a big gap. It has banned stablecoins Exporters (eg Circle or Paxos) who paid the interest, but remained silent on what Exchanges (Like Coinbase or Kraken) They can do this through their rewards programs.
Banks were quick to sound the alarm. They argued that if Coinbase could pass the return on to customers while banks were bound by partially reserved capital requirements, it created an unlevel playing field. Section 404 is effectively the direct response to these lobbying efforts “Correct” the GENIUS Code Censorship.
The “deposit flight” dilemma.
The reason behind this settlement is the fear of “deposit flight”. Traditional banks rely on low-cost deposits to fund their lending activities. When users transfer money into USDC to earn a 6% return on the exchange, that money leaves the traditional banking system, potentially tightening credit and increasing loan costs for ordinary Americans.
Senators Tillis and Albrooks were surprisingly frank about this in their joint statement:
“We have worked on a bipartisan basis with all stakeholders to address the banking industry’s concerns about deposit flight. Our compromise prevents stablecoin rewards from resembling interest on bank deposits, which is our primary concern about deposit flight.”
However, not everyone agrees that the threat was as serious as the banks claimed. A The latest White House report from the Council of Economic Advisers It found that banning stablecoin yields would only increase bank lending by a meager 0.02%. Some analysts, like Coin Bureau’s Nick Bookerin, have even argued that… The banks’ argument for a yield ban has essentially collapsed In the face of these data. However, policy often moves faster than economic reports, and the “deposit flight” narrative was strong enough to anchor Section 404 in the final bill.
Winners, losers and the “activity” loophole for stablecoin holders and issuers
The new regulatory landscape created by Section 404 creates a class hierarchy within the financial ecosystem, with entrenched institutional players finding a path to growth while speculative retail models face significant headwinds. Traditional banks emerge as the most immediate ‘winners’, having succeeded in restoring their monopoly on negative interest on deposits and neutralizing a major source of competition for retail savings.
At the same time, industry giants like Coinbase and Circle have embraced settlement as a practical trade-off. By sacrificing the ability to offer simple products that work, they have removed a key legislative hurdle Prevent the law of clarity From the coding of the Senate Banking Committee, which is now targeted for Week 11 May 2026.
Brian Armstrong, CEO of Coinbase, indicated his approval ofMark it“, while Chief Policy Officer Faryar Shirzad male The deal “protects what matters — Americans’ ability to earn rewards based on real usage.” This “real use” refers to a critical “activity vulnerability” built into Section 404, which explicitly allows rewards tied to real on-chain actions such as payments, transfers, trading, and staking.
Conversely, the “losers” in this new system were smaller cryptocurrency exchanges that relied on high-yield “hooks” to acquire users, as well as the average American consumer who saw stablecoins as an inflation-protected alternative to traditional savings. The industry is now being forced to move away from shadow banking and towards a model where value is generated through actual utility, effectively ending the era of negative retail returns.
The market respectfully agrees to disagree
The reaction from the financial world was a mixture of relief and resignation. Bank of America analyst Ibrahim Poonawalla described the decision as a… “Net positive across the bank’s sub-sectors” Noting that it removes a large cloud of regulatory uncertainty for banks looking to deal with digital assets.
In terms of cryptocurrencies, the general mood is one of practical acceptance. Journalist Eleanor Terrett noted that the joint statement issued by the senators indicated the deal was final, despite persistent grumbling from banking trade groups that wanted a tougher ban. Senators parting ways with banks? “We respectfully agree to disagree.”
Plumbing upgrade
The dissolution of Section 404 represents a pivotal shift in the cryptocurrency narrative. We are moving away from the era of “DeFi Summer” chasing triple-digit returns and toward the “Utilities Spring,” where stablecoins are seen as an upgrade to financial plumbing rather than a direct competitor to the bank next door.
By eliminating the temptation of “negative interest,” the Clarity Act forces the industry to prove its value through faster payments, cheaper money transfers, and more transparent transactions across the network. As the Senate Banking Committee prepares for May, the message is clear: Cryptocurrencies are invited into the house, but they must follow the neighborhood rules.
