The Digital Asset Market Clarity Act, a landmark bill to bring crypto assets into the economic mainstream, is on life support. This comes despite months of hard work and compromise for a set of rules that would be overwhelmingly positive for America by creating new business opportunities and reducing the risk of another FTX. Polymarket currently has the odds of passage this year at 25%.
The bill known as Clarity has struggled to get across the finish line for multiple reasons, but the biggest has arguably been the vicious interference campaign run by the banking industry. Their gripe? The fact the Genius Act—an important stablecoin law that passed last year—only bans direct interest payments to customers, which left the door open for third parties to reward their clients who use stablecoins like USDC. Clarity wasn’t supposed to be about stablecoins at all, but the banks weren’t content with the protectionist measures they’d already won, so they held Clarity hostage.
If you didn’t know any better and saw the scorched-earth tactics used to make their case, you’d assume American banks were in some kind of trouble. That their deposits must already be so scarce—and their profits so scant—that the industry needs government protection just to survive. How else do we explain the unlikely allies they found for their anti-stablecoin crusade, ranging from progressive think tanks to the Wall Street Journal editorial board?
But fear not, for the state of banking in the Union is strong. Profitability is up and the regulatory burden is down—two reasons why the KBW Bank Index has outperformed the NASDAQ over the past year. At the center of the current boom is the $740 billion in net-interest income (NII) the industry took home last year, per government data.
NII is the purest measure of how much money banks make from the simple act of taking money from depositors and lending it to borrowers, and at three-quarters of a trillion dollars, is a very big number. Larger than the GDP of Australia, or what the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) made in net income during the same period. Nobody in their right mind would argue that Alphabet and Nvidia need laws to protect them from competition, but lots of otherwise intelligent people believe that banks, an even more profitable group of companies, do need such protection. In this view, J.P. Morgan, a bank that made almost $100 billion in NII last year, might have to exit banking altogether if the crypto bros using Coinbase earn a few extra shekels on their USDC.
Of course the stablecoin snowflakes never put it that way. Instead they say fancy things like “competition for deposits may erode the banking industry’s ability to create credit, hurting farmers and small businesses.” But that’s an absurd claim given how most banks operate. JPM currently pays nothing to depositors, but charges close to 20% for credit card loans. Do we really think they’d stop issuing credit cards if they had to pay depositors a tad bit more interest?
For the record, there has never been a credible academic argument that even direct remuneration to stablecoin holders would deplete bank deposits. Even the Genius Act’s prohibition on direct interest payments was based more on myth than merit. Stablecoins are a private form of money, and all private forms of money eventually recycle through bank deposits. That’s exactly what happened with money market funds, another savings instrument that the banks fought using questionable arguments, only to be proven wrong. Trillions of dollars flowed into those products in the ensuing decades, but bank deposits are higher than ever.
In their mendacious campaign against Clarity, the bank lobby has also been careful not to mention that banks account for only 20% of credit creation in the U.S., and the largest banks only lend out half of the money they get from deposits. Likewise, we’ve heard little about how banks are far more likely to use deposits to park money at the Fed or to buy Treasuries than to give small business or farm loans, or about the industry’s periodic crises that have forced the government to rush in with bailouts costing billions[JJR1] . There is also the inconvenient truth that savers would benefit from competition for deposits, and there are more savers than borrowers. But instead of talking about these facts, the trade groups that represent the largest banks argue stablecoins threaten community banks, even though their “too big to fail” status keeps sucking in deposits from everyone else.
The whole thing is a headscratcher. Here we have a highly profitable industry that is also the recipient of various subsidies, but it acts like it’s doing us a favor. It has some of the most powerful lobbyists in Washington, and they spend most of their time lobbying for less regulation, except for stablecoins, which they’d like to see regulated to death. Banks also love to argue against giving FinTechs and crypto firms equal access to government-run infrastructure, citing safety and soundness concerns. The industry that gave us Lehman and SVB would have you believe it’s really PayPal you should be worried about. It also wants you to believe that crypto is an unusual enabler of illicit activity, as if no bank ever moved money to facilitate any kind of illicit activity.
I’ve spent a lot of time thinking about this but have no idea why America loves its banks so much, even though the banks clearly don’t love it back. Maybe it’s a form of Stockholm syndrome. We’ve been entrapped by this one industry for so long that we can’t let ourselves believe there are alternatives. Regardless, what I do know is that this kind of unrequited love usually ends badly. What begins as longing eventually turns into rage. All of the arguments banks make against potential competition could be used to justify more onerous restrictions on banks.
For instance, how about an American cap on credit card swipe fees? Why not? Europe and Australia already have this. How about a windfall tax on net-interest margins? If banks get to have a monopoly on interest-bearing deposits, they should be forced to pass the savings to borrowers, not pocket it as profit. Or we could have Congress reinstate Glass-Steagall, which for decades barred retail banks like JP Morgan from engaging in risky trading. After all, separating core banking from other activities is the best way to protect Americans from the risks banks keep projecting on FinTechs and crypto firms.
During the stablecoin debate, the banking industry has constantly argued that it should be treated like a utility performing an important social service. They should not be surprised if the forces of populism that are upending the rest of the economy eventually decide to do just that.
Omid Malekan is an adjunct professor at Columbia Business School and the author of several books on crypto and finance. The opinions expressed here are entirely his own.