Proposed compromises to a yield ban and concerns of a $6.6 trillion deposit flight could save CLARITY Bill. Can it work?
The future of the Digital Asset Market Clarity Act (CLARITY Act) hangs in the balance as negotiations encounter significant roadblocks. With Coinbase retracting its support and rising concerns from the banking sector, the White House has hinted it might withdraw its backing unless a satisfactory compromise is achieved. This situation threatens the bill’s chances of reaching the Senate floor for a vote before the 2026 midterm elections.
The primary contention revolves around stablecoin yields. On one side, crypto proponents, including Coinbase, are pushing for incentives like staking and activity-based rewards to encourage adoption. On the other, banks fear that such yields could lead to a massive migration of deposits, potentially destabilizing the economic landscape. These institutions, backed by organizations like the American Bankers Association (ABA) and the Independent Community Bankers of America (ICBA), warn that up to $6.6 trillion in deposits could shift to stablecoins, threatening to cut community bank lending by $850 billion and impairing their ability to support small businesses and households.
Bank of America’s CEO Brian Moynihan has raised alarms that stablecoins might undercut banks’ lending abilities, driving up borrowing costs by creating competition against traditional deposits. The current draft of the CLARITY Act seeks to prohibit passive rewards, permitting only limited activity-based incentives. However, this move might alienate the crypto sector, hindering innovation. Coinbase CEO Brian Armstrong has criticized the draft as even more restrictive than existing regulations, pointing to its limitations on tokenized equities, DeFi, privacy, and stablecoin incentives that helped Coinbase secure $355 million in revenue in the third quarter of 2025.
A balanced solution is essential. This would involve allowing yields and staking opportunities, permitting community banks to participate without risking their earnings, and introducing a phased fractional reserve system. Over three years, this system would transition from a 1:1 to a 4:1 reserve ratio to reduce potential risks. It would also require segregated stress tests to ensure compliance and mandate an industry-wide on-chain interoperability and clearing layer. This layer would make transactions seamless across different banks, assuring users of safety and functionality regardless of the issuing institution.
Tokenized deposits present a potential bridge, offering digital versions of traditional deposits that maintain fractional reserves, earn interest, and benefit from deposit insurance. To succeed, these deposits must integrate with the interoperability layer to function seamlessly across banks. Such a framework would keep community bank earnings stable by retaining deposits within the system while driving modernization and competition in digital finance.
It is crucial to incorporate periodic stress tests and proof-of-reserves mechanisms into regulatory disclosures. These would be filed through a system managed by the SEC, utilizing new disclosure models. As proposed by Auditchain Labs AG in collaboration with Rutgers Business School, this system would use structured, machine-readable formats like XBRL to promote transparency and real-time verifiability. This approach would align with the high standards of U.S. capital markets, which continue to set the benchmark globally.
Below, we propose two alternative compromises, each incorporating these elements while addressing the $6.6 trillion deposit flight risk through calibrated safeguards.
Alternative 1: Tokenized Deposit-Centric Model with Phased Fractional Reserves
This approach prioritizes tokenized deposits as the primary vehicle for banks to enter the stablecoin space, leveraging existing banking authority under the GENIUS Act (which excludes tokenized deposits from stablecoin rules). Community banks could issue tokenized deposits—digital claims on insured fiat deposits—while introducing limited fractional reserves to preserve lending without excessive risk.
Fractional Reserves: Start with full 1:1 backing in Year 1, phasing to 4:1 over three years (e.g., 2:1 in Year 2, 3:1 in Year 3, reaching 4:1 by Year 4). This gradual implementation allows banks to lend a growing portion of reserves, offsetting any deposit migration by generating new revenue streams. Reserves must be held in high-quality liquid assets (HQLAs) like U.S. Treasuries and insured deposits, with real-time on-chain proof-of-reserves.
Yields and Staking: Align with Coinbase’s position by permitting activity-based yields (e.g., 3.5-4.5% APY for transactions or DeFi participation) and limited passive staking rewards, capped at levels competitive with savings accounts (e.g., 2% APY). Yields would be funded from bank lending profits, ensuring no direct competition with uninsured stablecoins.
Interoperability and Clearing Layer: Mandate an industry led on-chain clearing layer that enables atomic swaps and seamless transfers across bank-specific tokenized deposits. Users could hold a “universal” digital wallet view, agnostic to the issuing bank, with automated routing for optimal liquidity—protecting consumers from bank-specific failures via shared resolution mechanisms.
Stress Tests and Compliance: Require quarterly segregated stress tests (modeled on Federal Reserve scenarios) to verify minimum reserve compliance under volatility shocks, with results disclosed publicly. Tests would simulate $6.6 trillion outflows, ensuring banks maintain phased ratios. Programmable compliance (e.g., smart contracts halting yields if ratios dip) adds enforcement. Proof-of-reserves audits, conducted monthly via blockchain attestations, must be included in new regulatory disclosure models as proposed by the new XBRL US Digital Asset Working Group recently initiated by Auditchain Labs. This ensures machine-readable, verifiable reporting for stakeholders.
Impact on Banks: Zero earnings erosion—banks retain deposits as tokenized versions stay on-balance-sheet, enabling new fees from digital services (e.g., 24/7 cross-border payments). This modernizes community banks, allowing competition with crypto natives without cannibalizing core lending.
This model minimizes deposit flight by keeping funds within regulated banking, potentially recycling $6.6 trillion into tokenized forms that boost liquidity without disintermediation.
Alternative 2: Hybrid Stablecoin Framework with Phased Fractional Integration
For a more ambitious path, this hybrid blends stablecoin issuance with tokenized deposits, allowing banks to issue regulated stablecoins while gradually introducing fractional elements. It addresses Coinbase’s yield demands through broader incentives while using interoperability to shield community banks.
Fractional Reserves: Begin with 1:1 backing in Year 1, transitioning to 4:1 over three years (e.g., 2:1 in Year 2, 3:1 in Year 3, full 4:1 by Year 4), conditioned on successful stress test performance. Fractional portions must fund community lending (e.g., small-business loans), directly countering the $850 billion lending reduction fear. Reserves blend HQLAs with tokenized assets for flexibility.
Yields and Staking: Fully adopt Coinbase’s advocacy—allow passive yields (up to 3% APY for holdings) and staking rewards tied to DeFi network participation. Banks could offer these as “enhanced deposits,” with yields sourced from fractional lending income, creating a revenue-neutral model.
Interoperability and Clearing Layer: Build on the model in Alternative 1 above but extend to a “universal stablecoin rail” via shared blockchain infrastructure (e.g., Ethereum Layer 2). Bank-issued stablecoins and tokenized deposits would interoperate via a central clearing entity (e.g., a Fed-supervised hub), enabling DvP settlements and automatic failover to another bank’s reserves during high stress events. Users experience a single, pegged asset, indifferent to origin—mitigating risks from individual bank failures.
Stress Tests and Compliance: Implement quarterly segregated stress tests, focusing on interoperability resilience (e.g., simulating network congestion or $6.6 trillion shifts). Minimum compliance requires 100% redemption guarantees, with automated haircuts on yields during stress. Proof-of-reserves, verified through on-chain attestations, must accompany stress test results in disclosures filed with the SEC’s proposed XBRL-administered system, championed by the XBRL US Digital Asset Working Group in Alternative 1 above. This structured format enables automated oversight and analysis.
Impact on Banks: Earnings neutrality achieved by channeling fractional reserves back into lending, potentially increasing net interest margins. Community banks gain access to crypto yields without losing deposits, fostering competition through shared infrastructure .
This hybrid reduces flight risks by capping fractional elements initially, recycling potential outflows into bank-issued stablecoins that support lending.
Clarity Through Compromise and Enhanced Disclosure
Either alternative could salvage the CLARITY Act by addressing the White House’s call for consensus—protecting against $6.6 trillion deposit erosion while enabling yields, staking, and innovation. By mandating interoperability, these frameworks ensure consumer safety and bank competition, transforming potential threats into opportunities. As Senate committees regroup (with Agriculture eyeing January 27), incorporating these elements could secure bipartisan support, preventing gridlock and cementing U.S. leadership in digital finance. The key? Pairing rules with verifiable transparency—leveraging new SEC disclosure models as proposed by Auditchain Labs – XBRL US initiatives to build enduring trust.
