- Key insight: With Congress on vacation and the midterms looming, the crypto and the banking industries are looking at navigating a world without the market structure bill.
- Forward look: The crypto-market structure bill could still pass this year, but probably only if Congress decides the unlikely route of appeasing neither the banking industry nor large crypto players like Coinbase.
- What’s at stake: Experts say that the stakes for crypto firms of not passing some kind of market structure legislation is higher on the yield issue.
WASHINGTON — Bankers and crypto firms might have to reckon with the status quo over a contentious part of crypto legislation, a prospect that’s not desirable to either party but could ultimately end up favoring banks.
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Banks and crypto firms still can’t get on the same page about to what extent stablecoin companies can offer yield-like products, a conflict that’s put the market structure bill on hiatus as lawmakers depart Washington for a two-week Easter recess.
Lawmakers had hoped to broker a compromise between
And time is running out to get a crypto-market structure bill passed before Congress potentially flips to the Democrats after the midterm elections. The only likely way the bill becomes law ahead of that point is if Congress ignores the objections of both the crypto and the banking lobby, and passes a law neither is happy with, TD Cowen analyst Jaret Seiberg said in a note.
“Such an outcome is possible as Congress occasionally passes legislation simply to get it done,” he said. “As this is the exception and not the rule, we remain pessimistic for action.”
In that case, with Congress at a partisan standstill with the White House, it looks increasingly likely that the language passed last year in the stablecoin bill — a general prohibition on stablecoin issuers offering yield — will be
Neither side is satisfied with that framework, but for banks, the lack of legislative clarity preserves a system where stablecoins remain a relatively small and constrained part of the financial system.
Generally, bank groups have argued that crypto firms’ ability to offer yield-like rewards on stablecoins could drain deposits from the banking system. But companies such as crypto exchange Coinbase are already offering rewards on stablecoins via a number of programs such as its subscription service, and those fears haven’t come to pass.
“I’m a little confused by the pushback by the banking industry, given how little headway stablecoins have made, despite them being around for a long time,” said Ed Groshans, a senior policy and research analyst at Compass Point Research. “We’re not seeing the negative ramifications that people are talking about.”
This means that for banks, especially large ones, there’s less urgency for Congress to act, despite the fact that banks would ideally like to have a broader prohibition on third parties offering yield-like rewards.
“It’s very clear that the big players aren’t worried about depository, at all, even though that’s the outward presentation,” Groshans said. “I think the big banks come out on top. When we talk about community banks, and what we call the $10 billion-and-under banks, they’re probably most at risk.”
For crypto firms, the wording of the stablecoin yield is critical to the industry’s future, experts said.
Much of the industry’s current growth strategy relies on offering users these rewards. The biggest example of this is the relationship between Coinbase and stablecoin issuer Circle. Circle takes in dollar deposits and invests them in short-term Treasuries. It shares a portion of that yield with Coinbase and other partners, which pass them on as rewards to customers.
Coinbase did not respond to a request for comment.
Without a specific allowance for those kinds of arrangements — which the crypto industry hoped would come with the market structure bill — that model is at risk.
“Let’s say Circle is no longer able to pass through some yield to Coinbase, Coinbase won’t get additional customers and supply. Their business could be kind of demolished,” said Colin Butler, executive vice president and head of global financing at stablecoin company Mega Matrix. “I don’t want to be extreme and say existential threat, but it would be a significant potential economic threat to both parties.”
Specifically at issue between crypto firms and banks is “staking,” a process in which users lock up their crypto tokens to help validate transactions on a blockchain network and, in return, receive rewards. While the mechanism differs from a traditional bank deposit, it can appear similar to consumers earning a return on their holdings.
“The problem from the bank’s perspective is that if Coinbase is allowed to pay rewards for staking, that looks exactly like custody,” said Todd Phillips, an assistant professor of legal studies at Georgia State University and a fellow at the Roosevelt Institute. “Users do not understand the difference between custody for, like, custody sake and custody for staking.”
The current proposed language doesn’t define staking, three people familiar with the text of the Tillis-Alsobrooks provision said. The bill bans rewards for simply holding stablecoin, not for taking activities with it. But the nebulous definition of “staking” leaves the legality of offering rewards for doing so unclear.
“Much of this has been Coinbase saying we want to do activity-based whatever, and the banking industry saying we’re fine with that, except for staking and Coinbase saying, no, that’s an activity,” Phillips said.
The difference right now is up to regulators, notably the Office of the Comptroller of the Currency, to decide. While the current administration has outlined a crypto-friendly approach, guidelines and rules can be revamped realistically in the span of a presidential term.
“I think this OCC would say putting customers’ stablecoins in a staking protocol is different from a deposit account,” Phillips said. “But you know, the next Democratic comptroller is probably going to see things differently.”
