Banks and crypto firms clash over interest-bearing stablecoins in Washington. The outcome could reshape $311B in digital dollars and traditional banking.
The biggest fight in crypto regulation right now is not about Bitcoin ETFs or token classifications. It is about a deceptively simple question: should stablecoin holders earn interest on their money?
On one side, the American Bankers Association (ABA) and community banks warn that interest-bearing stablecoins could drain up to $1.5 trillion from the traditional banking system. On the other side, Coinbase CEO Brian Armstrong calls the yield ban a "red line issue" and predicts banks will eventually lobby for stablecoin interest payments.
The stakes are enormous. Stablecoin transaction volume hit $33 trillion in 2025, up 72% year-over-year. With supply projected to exceed $1 trillion by late 2026, reserve yields alone could generate $40-45 billion annually. The question of who captures that value will define the next era of digital finance.
The February 10 meeting brought together banking executives, crypto industry leaders, and senior administration officials. According to CoinDesk, bankers arrived with a "principles" document calling for a complete prohibition on stablecoin yield, effectively refusing to negotiate on the issue.
White House officials pressed both sides to return with draft bill language by late February or March 1. The deadline signals growing urgency from the administration, which hoped to see the CLARITY Act finalized before midterm elections.
The impasse stems from the GENIUS Act, signed into law in July 2025. While it created the first comprehensive federal stablecoin framework with 1-to-1 reserve requirements, it also explicitly banned interest payments on payment stablecoins. As we covered in our CLARITY Act analysis, the broader push for regulatory clarity has been building since January. Crypto firms argue this restriction is anticompetitive. Banks say it is essential for financial stability.
Coinbase and its allies make three core arguments for allowing stablecoin yield:
Consumer benefit. Average U.S. savings accounts pay 0.39% interest, while checking accounts offer just 0.07%. Coinbase currently offers 4.1% APY on USDC for its paid members, with enhanced lending through Morpho yielding up to 10.8%. Armstrong has stated plainly: "People should be able to earn more on their money."
Global competition. Armstrong warned at Davos in January 2026 that China's CBDC will pay interest, and offshore stablecoins already offer yield without U.S. regulatory oversight. Banning yield on U.S.-regulated stablecoins could push activity to less regulated jurisdictions.
Market reality. Yield-bearing stablecoins have already surged to $10.8 billion in total value locked, offering 4.8% to 27% APY. Products like YLDS, the first SEC-registered yield-bearing stablecoin, demonstrate that compliant yield products are possible. The genie may already be out of the bottle.
Banks raise equally serious concerns:
Deposit flight. The Bank Policy Institute (BPI) estimates that interest-bearing stablecoins could trigger deposit losses of 25% or more, reducing bank lending capacity by approximately $1.5 trillion. That represents over one-fifth of all consumer, small-business, and farm loans. Standard Chartered projects U.S. regional banks may lose $500 billion in deposits by 2028 even under current rules.
Community impact. ABA President Rob Nichols warned that the "fear is that money would leave depository institutions and would be parked in a payment mechanism but it wouldn't create economic growth." Community banks, which depend heavily on deposits for local lending, could be disproportionately affected.
Systemic risk. Unlike bank deposits, stablecoins are not FDIC-insured. A mass migration of savings into yield-bearing stablecoins would shift risk from a regulated, insured system to one with fewer safety nets. Treasury market distortions are also a concern: research suggests every $3.5 billion in stablecoin inflows reduces U.S. Treasury yields by 2-2.5 basis points.
Understanding the scale of money at stake explains why both sides are dug in.
Circle generated $1.7 billion in revenue in 2024, with 99% coming from interest income on reserves. The stablecoin market's institutional momentum has only accelerated the urgency of this debate. Tether reported $10 billion in profit through the first three quarters of 2025 from the same source. If stablecoins reach the projected $1 trillion supply by late 2026, reserve yields could generate $40-45 billion annually.
The DeFi sector calls this dynamic a "silent vampire attack": issuers capture massive value from reserves while holders receive nothing. The debate over who should benefit from that yield, issuers, holders, or the broader financial system, is at the core of the Washington standoff.
The U.S. debate does not exist in a vacuum. The global regulatory landscape offers contrasting approaches:
European Union. Under MiCA regulations, which reach full enforcement by July 1, 2026, stablecoin issuers are explicitly prohibited from paying interest. The EU treats stablecoins as payment instruments, not investment products, and requires 100% reserve backing with monthly audits.
United Kingdom. The UK is taking a more flexible approach. While secondary legislation is expected to take effect during 2026, the UK has not explicitly banned yield-bearing stablecoins, positioning itself as potentially more crypto-friendly than both the EU and the U.S.
The pattern. Most jurisdictions with enacted regulation have chosen to restrict yield to keep stablecoins payment-focused. The U.S. and UK remain the notable exceptions still debating the issue.
The immediate timeline is clear but the outcome is not:
White House deadline for both sides to submit draft bill language
GENIUS Act requires regulators to issue additional stablecoin regulations
Stablecoin supply projected to exceed $1 trillion
The CLARITY Act, which passed the House with bipartisan support in July 2025, remains stalled in the Senate largely because of this single issue. The broader push for SEC-CFTC cooperation on crypto oversight adds further complexity to the legislative picture. Recent committee activity suggests movement: the Senate Agriculture Committee advanced the Digital Commodity Intermediaries Act on a party-line vote in late January.
A compromise could emerge. The Senate Banking Committee's January draft proposed prohibiting interest for simply holding stablecoins, but allowed rewards linked to activity or usage. This middle ground could satisfy both sides partially, but neither camp has endorsed it publicly.
For DeFi protocols, the outcome will determine whether compliant liquidity or offshore capital dominates the next growth cycle. If U.S.-regulated stablecoins cannot offer yield, DeFi innovation may increasingly move to jurisdictions with more permissive rules.
For investors, the resolution affects portfolio construction directly. Stablecoins are no longer just parking spots between trades. They represent a growing asset class that institutional players, with $17 billion in DeFi and RWA TVL, are actively building on.
Armstrong's bold prediction deserves consideration: "Banks will actually flip and be lobbying FOR the ability to pay interest and yield on stablecoins in a few years." If stablecoins continue their trajectory toward becoming core financial infrastructure, the competitive pressure may prove irresistible.
The stablecoin yield war is not just a regulatory skirmish. It is a fundamental clash over the future of money. Banks want to protect the deposit-based model that has powered lending for centuries. Crypto firms want to build a new financial layer where yield flows directly to users.
Both sides have legitimate concerns. The challenge for Washington is crafting rules that protect financial stability without stifling innovation, or pushing it offshore. The White House's late-February deadline will be the next inflection point. Until then, the $311 billion stablecoin market continues to grow while the rules remain unsettled.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Cryptocurrency investments carry significant risk. Always conduct your own research and consult with a qualified financial advisor before making investment decisions.
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