- Key insight: As Congress takes its break and midterm elections approach, both the crypto and banking sectors are preparing for a potential landscape devoid of a market structure bill.
- Forward look: There remains a possibility for the crypto-market structure bill to be enacted this year, but that may only occur if Congress opts for the unusual route of not catering to either the banking sector or major crypto entities like Coinbase.
- What’s at stake: Analysts emphasize that the absence of market structure legislation poses significant risks for crypto companies, particularly regarding yield issues.
WASHINGTON — Both banking institutions and cryptocurrency enterprises may need to confront the existing environment concerning a controversial aspect of crypto regulation, a scenario neither side favors yet may inadvertently favor banks.
Neither banks nor cryptocurrency firms have reached a consensus on the extent to which stablecoin companies can offer yield-like products, a disagreement that has paused the market structure bill as lawmakers embark on a two-week Easter recess.
Legislators were aiming to facilitate a compromise between
With the midterm elections approaching, there’s a shrinking window for passing a crypto-market structure bill before Congress may shift to a Democratic majority. According to TD Cowen analyst Jaret Seiberg, the only feasible way for the bill to become law prior to that shift is if Congress disregards the complaints from both crypto and banking interests and passes a bill that neither party approves of.
“Such an outcome is possible as Congress occasionally enacts legislation simply to complete it,” he noted. “However, since this is not a common occurrence, we remain skeptical about any forthcoming action.”
If this scenario unfolds, and with Congress and the White House in a deadlock, it seems increasingly likely that the language established in last year’s stablecoin bill — which generally prohibits stablecoin issuers from offering yield — will remain
Though neither party is content with this framework, banks benefit from a lack of legislative clarity that keeps stablecoins a relatively minor and limited component of the financial landscape.
In general, banking groups argue that allowing crypto firms to offer yield-like incentives on stablecoins could siphon deposits from the banking system. However, exchanges like Coinbase are already providing rewards on stablecoins through various programs, such as their subscription service, and these concerns have not materialized into reality.
“I’m somewhat puzzled by the banking industry’s resistance, given the limited impact stablecoins have made, even though they have been available for quite some time,” stated Ed Groshans, a senior analyst at Compass Point Research. “We’re not witnessing the negative consequences that have been discussed.”
This suggests that for banks, particularly larger ones, there’s less urgency for Congressional action, despite their preference for a broader ban on third-party yield-like incentives.
“It’s apparent that major banks are not particularly concerned about deposits, despite appearances to the contrary,” Groshans added. “Ultimately, I think big banks benefit. In contrast, community banks, especially those with assets under $10 billion, are likely to be most jeopardized.”
For crypto firms, the wording regarding stablecoin yields holds paramount importance for the sector’s future, according to experts.
Current growth strategies for many crypto companies hinge on providing users with these rewards. A significant player in this area is the partnership between Coinbase and stablecoin issuer Circle. Circle receives dollar deposits and allocates them to short-term Treasuries, sharing a portion of that return with Coinbase and other partners, who then distribute it as rewards to customers.
Coinbase did not provide a comment when solicited.
If specific permissions for such arrangements — which the crypto sector anticipated would be included in the market structure bill — are not established, this model faces potential risks.
“If Circle is unable to pass along any yield to Coinbase, then Coinbase might struggle to attract new customers and suppliers, which could severely impact their business,” remarked Colin Butler, executive vice president and head of global financing at stablecoin company Mega Matrix. “While I hesitate to label it an existential threat, it certainly poses a significant economic risk to both organizations.”
The debate between crypto firms and banks primarily revolves around “staking,” a process that allows users to lock their crypto tokens to validate blockchain transactions in exchange for rewards. Although this mechanism differs from traditional bank deposits, it may resemble consumer returns on their assets.
“From the banking perspective, the concern arises if Coinbase is granted permission to provide rewards for staking, as it may appear akin to custody arrangements,” explained Todd Phillips, an assistant professor of legal studies at Georgia State University and a fellow at the Roosevelt Institute. “Users may not recognize the distinction between custody for traditional purposes and staking.”
The proposed language currently does not clarify staking, according to three individuals familiar with the details of the Tillis-Alsobrooks provision. The bill prohibits rewards solely for holding stablecoin, but the ambiguous definition of “staking” leaves the legality of offering rewards for that action uncertain.
“Much of this revolves around Coinbase asserting their desire for activity-based incentives, while the banking sector agrees but draws a line at staking, with Coinbase arguing that it’s indeed an activity,” Phillips noted.
The realization of this difference now depends on regulatory bodies, chiefly the Office of the Comptroller of the Currency. While the current administration has outlined an accommodating stance towards crypto, policies can shift significantly over a presidential term.
“I believe the OCC would argue that placing customers’ stablecoins into a staking protocol is distinct from a deposit account,” commented Phillips. “However, a future Democratic comptroller may interpret the situation differently.”