Economists from the White House have determined that prohibiting cryptocurrency firms from providing stablecoin rewards would insignificantly affect community banks, with a modest lending increase of just 0.026%. This conclusion contrasts sharply with industry warnings about severe deposit losses.
In their analysis released on Tuesday, the Council of Economic Advisers weighed in on the ongoing debate between traditional banking and proponents of crypto yield products. Their economic models suggest that banning stablecoin rewards could enhance bank lending by $2.1 billion at a net welfare cost of $800 million, translating to a 0.02% increase in lending.
Community banks would be responsible for only 24% of this additional lending, equating to $500 million—a 0.026% rise from current levels.
Even under extreme assumptions, such as the stablecoin market growing sixfold, the report indicates that community banks’ lending could see a 6.7% increase or $129 billion.
This perspective starkly differs from claims by banking industry groups like the Independent Community Bankers of America, who argue that small banks face losing $1.3 trillion in deposits and $850 billion in loans if legislation allowing stablecoin yields is enacted.
“The conditions for finding a positive welfare effect from prohibiting yield are similarly implausible,” they stated, noting that blocking stablecoin yields would “do very little to protect bank lending while forfeiting consumer benefits of competitive returns on stablecoin holdings.”
This report emerges as the Clarity Act, which aims to either ban third-party stablecoin rewards or set their legal framework, remains stalled in Congress due to intense lobbying from both banking and crypto sectors. Companies like Coinbase, offering 3.5% annual percentage yield on USDC balances for certain customers, are seeking regulatory clarity while traditional banks push for restrictions.
The White House has been actively facilitating negotiations on stablecoin policy amid a divided financial services industry. Banking trade groups argue that unrestricted stablecoin yields threaten their deposit bases and lending abilities, especially within smaller institutions serving rural areas.
As crypto firms increasingly challenge traditional banking services with yield offerings, the debate over stablecoins intensifies. Senator Cynthia Lummis encouraged banks to “embrace” stablecoins in February during the Clarity Act deadlock. Lawmakers signal a crucial vote on crypto market structure legislation in April, with a May deadline for its passage. Meanwhile, conventional banks are expanding into crypto custody services while lobbying against yield-bearing stablecoin products.