Crypto and Big Banks Fight Over Who Gets to Fleece You
Wall Street and the crypto industry are engaged in a legislative battle over which business interests will get to fleece more of their customers’ money, with big banks hoping to close a loophole that allows cryptocurrencies to pay interest to investors.
Brian Armstrong, CEO of crypto company Coinbase, speaks at the Stand With Crypto rally to get out the vote on Monday, March 4, 2024, in Los Angeles, California. (Jason Armond / Los Angeles Times via Getty Images)
Wall Street and Silicon Valley are embroiled in a legislative slugfest over which business interests will get to fleece more of their customers’ money.
A loophole under current law allows stablecoins — crypto tokens pegged to the US dollar — to essentially pay interest on their investors’ holdings, similar to a bank account except without the same regulatory guardrails.
This carve-out could lure depositors away from banks’ savings accounts — a move that would threaten a multitrillion-dollar scheme by the banking industry in recent years, in which they’ve paid minuscule interest on customers’ financial deposits while enjoying far higher interest rates from the country’s central bank and pocketing the difference.
Now banks have launched a last-minute lobbying offensive to protect their margins and avoid competition by preventing crypto from copying their business model. They’re trying to insert new language related to the loophole into a piece of stablecoin legislation, known as the Clarity Act, which the crypto industry had been backing for months.
In its last reported lobbying filing of 2025, the American Bankers Association, the main trade group representing the banking sector, spent more than $2 million on lobbying, including on the Clarity Act.
The group sent a letter to the Senate on January 13 threatening that the interest-rate loophole put trillions of dollars worth of bank deposits at risk. Last week, lawmakers granted the bank lobby’s wishes and inserted a provision that would partially limit crypto issuers’ ability to pay out interest. The crypto industry subsequently walked away from the deal, derailing negotiations.
Neither the American Bankers Association nor the Blockchain Association responded to a request for comment from the Lever on Tuesday.
Since the Federal Reserve started hiking interest rates in 2022, in part to address spiraling inflation since the beginning of the pandemic, the country’s biggest banks have reaped massive profits. The high interest rates have allowed banks to collect higher returns on loans they issue using depositors’ savings, while the average checking account at major banks still offers an annual interest rate of less than 0.1 percent.
This difference between interest paid to depositors and interest collected from loans — called net interest income — has always been central to banks’ business model. But in a Senate letter sent to executives at Wells Fargo, JPMorgan Chase, Bank of America, and other major financial institutions last year, Sen. Elizabeth Warren (D-MA) wrote that banks’ refusal to pass down any of their mounting profits to consumers over the last three years has allowed this net interest income to reach historic levels, creating a massive upward transfer of wealth from account holders to banks.
If savers moved their money to higher-yielding accounts — or to smaller regional and local banks, which have historically passed down more money to depositors than megabanks when interest rates increase — they could recoup tens of billions of dollars, as the Wall Street Journal has reported. But the cartel-like grip that megabanks have on the economy has helped quell competition and kept savers collecting paltry interest rates on their nest eggs.
From this vantage point, stablecoins that pay interest to investors — which the crypto exchanges call “rewards” — could pose a competitive threat to banks’ interest rate arrangements.
Larger Rewards, Riskier Investments
While interest-paying stablecoins may threaten banks’ net-interest-income scheme, these crypto arrangements pose their own potential harms to consumers.
Financial watchdogs have argued the interest rate loophole allows crypto exchanges to enjoy the benefits of ordinary banking without the regulatory safeguards, such as government-backed federal deposit insurance that can protect depositors’ savings in the case of a bank failure. While crypto token issuers can promote their products as deposits, they are not held to the same capital requirements as banks to ensure they safely invest depositors’ cash.
“The larger the rewards customers are being paid, the riskier the investments generating that money,” wrote Aaron Klein, a financial policy analyst at the Brookings Institution think tank, in a recent blog post. “Banks do this with your deposits, but with tight limitations, constant oversight, and federal deposit insurance that fully covers 99 percent of depositors.”
Stablecoins are technically prohibited from offering interest because the assets are exempt from ordinary banking regulations, thanks to a recently enacted crypto law called the GENIUS Act. (Various nonbank financial actors have long attempted to offer interest on consumers’ savings — a model that Bloomberg columnist Matt Levine terms “narrow banking” — such as the failing fintech app Juno.)
But through a legal workaround, stablecoin issuers can offer their investors “rewards” funneled through crypto exchanges where the coins are traded, achieving the same result as delivering interest on a savings account. The crypto exchanges now even promotestablecoins with a listed percentage of rewards in the same format as banks use to indicate financial products’ interest rates.
The new crypto bill includes what was considered a compromise provision to partially close this loophole, while allowing it to remain in place for certain stablecoin “activities.” Some lawmakers were reportedly prepared to introduce amendments that would go even further and eliminate the loophole entirely.
But the bill would also grant the crypto industry regulatory wins, such as classifying stablecoins as an asset rather than a security. Doing so would shield the currencies from scrutiny by the Securities and Exchange Commission and instead place them under the purview of the far smaller and more industry-friendly Commodity Futures Trading Commission.
The new crypto bill was scheduled for a markup hearing and vote in the Senate Banking Committee last week, but once the crypto lobby learned of planned last-minute provisions closing the stablecoin loophole, it withdrew its support for the legislation.
There is no longer a clear timeline for the bill’s passage, as banking and crypto interests continue to spar over the matter. The White House has reportedly intervened in an attempt to resolve the dispute between two of the Republican Party’s largest donor interest groups.