Woofun AI reports that seventy-six banking groups have formally urged the U.S. Senate to close a critical regulatory loophole within the Clarity Act, arguing that existing provisions allow digital asset platforms to offer deposit-like yields on stablecoins without adhering to traditional banking oversight standards.

The industry coalition’s July 13 letter does not call for abandoning the market-structure bill entirely. The groups support "responsible innovation" and a regulated digital-asset market but argue that exchanges and affiliated service providers may still be able to reward stablecoin balances without formally describing the payments as interest or yield. This distinction is central to their concern regarding the GENIUS Act framework, which prohibits permitted payment stablecoin issuers from paying interest or yield solely for holding, using or retaining a payment stablecoin.

However, Section 404 of the Senate-reported Clarity Act addresses digital asset service providers and their affiliates, including platforms that may offer rewards even when the issuer does not, creating a potential regulatory gap.

The bill bars covered parties from paying interest or yield "solely in connection with the holding" of stablecoins or in a manner "economically or functionally equivalent" to interest on a bank deposit. It still permits rewards connected to bona fide payments, transfers, remittances, liquidity provision, collateral, staking, governance and product use. The banks accept that distinction but see a structuring loophole. A platform could attach a minor transaction or loyalty condition to a balance-based reward and argue that the payment is no longer made solely for holding stablecoins. This technicality allows entities to bypass the spirit of the prohibition while remaining within the letter of the law.

The deeper driver is the mechanics of disguised yield. Interest is commonly calculated from principal and time. Using those same variables could create a reward that behaves like yield while being marketed as points, tokens, loyalty benefits or promotional consideration. "Removing this provision aligns with our shared objective to not incentivize the idle holding of payment stablecoins for extended periods of time," the associations wrote. Keeping it, they added, "would negate the goals of the upfront prohibition" by tying rewards to how much stablecoin customers hold and for how long. The program would appear activity-based even if its value remained driven mainly by the amount held and the holding period.

Woofun AI data shows that the economic impact on traditional banking is the primary concern behind this regulatory push. Deposits support mortgages, agricultural finance, small-business credit and other lending. A stablecoin product paying deposit-like rewards could redirect funds from insured accounts into wallets or exchange balances. Section 404 itself recognizes both sides. The text says deposit-like compensation may inhibit banks’ economic functions, while activity-based rewards can support payment innovation, competition and consumer adoption. The unresolved question is where to draw the boundary between legitimate incentives and shadow banking activities.

Notably, the banking groups want regulators to judge a program by its substance rather than its label. Their "substantially similar" test would make avoidance harder, although it could also reduce certainty for platforms designing legitimate loyalty programs. The associations are not alone in challenging the current approach. JPMorgan CEO Jamie Dimon has also argued that the Clarity Act could allow stablecoin platforms to offer deposit-like returns without facing equivalent banking oversight, adding Wall Street pressure for revisions before the bill reaches the Senate floor. This alignment between community banks and major financial institutions highlights the severity of the perceived risk.

The dispute is further complicated by an ethics debate involving Senator Elizabeth Warren and Donald Trump. Warren renewed a separate criticism of the bill, stating, "Without strong ethics guardrails, the Clarity Act will make it even easier for Donald Trump to continue to profit off his crypto ventures." Miles Jennings, Head of Policy and General Counsel for a16z crypto, replied: "More lies. Currently, there are NO ethics guardrails on crypto. CLARITY puts new guardrails in place." Their disagreement partly reflects different meanings of "guardrails." The Senate-reported text preserves existing federal ethics laws and says members of Congress and senior executive-branch officials may not issue a digital commodity while in public service. It also requires conflict-of-interest rules for registered market entities and includes disclosure, anti-fraud and anti-evasion provisions.

Warren’s criticism is broader, focusing on Section 111 which focuses on issuance during public service and does not expressly create a blanket ban on benefiting from crypto ventures established before taking office. Jennings is correct that the bill contains and preserves regulatory restrictions; Warren argues that they do not sufficiently address financial conflicts involving a sitting president. Neither post resolves the banks’ Section 404 objection. Warren is discussing public-official ethics, while the ABA and ICBA are asking whether private platforms can recreate deposit-style yield. The issues may both affect Senate support, but they concern different parts of the bill.

Structurally, the dispute is unfolding under a compressed legislative calendar. The Senate returned to Washington on July 13 with roughly four weeks before its August 10 recess, while a unified market-structure bill had still not been published and ethics provisions remained among the unresolved issues. All 76 associations want to preserve payment and usage incentives while eliminating structures that reward passive stablecoin accumulation. Their proposed edits would make the prohibition broader, particularly by deleting the balance-and-duration calculation clause. This timeline pressure increases the likelihood of rushed compromises that may leave vulnerabilities intact.

The final proposal centers on durable rules and consumer protection. Policy choice is not between banning every reward and allowing rewards without limits. It is whether the final language can distinguish cashback tied to real transactions from a savings-style product whose return grows with the size and age of a stablecoin balance. The groups urged senators to incorporate the revisions before passage, arguing that clearer language would create "durable rules of the road" while reducing unintended risks for consumers, community banks and local credit markets. This marks a critical juncture for U.S. digital asset regulation, where the definition of yield could determine the future stability of the traditional banking sector.