Banks Risk Fueling Tether’s Grip, Blocking Stablecoin Rewards

Coinbase CLO warns banks that banning stablecoin rewards could strengthen unregulated Tether’s $187B market dominance amid policy standoff.

Coinbase’s Chief Legal Officer, Paul Grewal, issued a stark warning this week. Banks blocking stablecoin rewards might accidentally hand more power to Tether.

The warning came through a post on X, where Grewal stated: “The irony for banks is that if they poison CLARITY with a US rewards ban, this is how stablecoins will actually poison them.”

White House meetings between Wall Street bankers and crypto executives hit a wall. President Trump’s administration pushed for compromise. Banks refused to budge on their position that no stablecoin yield or reward is acceptable, according to CoinDesk.

The bankers argued that such yields threaten the depository activity at the heart of U.S. banking system. They laid out their stance in a one-page paper titled “Yield and Interest Prohibition Principles.”

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Digital Chamber Fires Back

The Digital Chamber responded Friday with its own principles document. CEO Cody Carbone told CoinDesk they want to make the case for policymakers.

The industry group’s document defends the Senate Banking Committee’s draft bill. That bill outlines situations where rewards could be acceptable. The Chamber said it’s willing to give up ground on anything resembling interest payments for static stablecoin holdings.

But they want to keep rewards for transactions and other activities. Carbone suggested bankers should return to the negotiating table.

“If they don’t negotiate, then the status quo is that just rewards continue as-is,” Carbone said. He noted his group’s membership includes banking members, putting them closer to the middle of the discussion.

The crypto industry has been pursuing stablecoin products allowed under last year’s GENIUS Act. Banks are trying to dial back that law with edits in the pending Digital Asset Market Clarity Act.

The Tether Question Nobody Wants to Answer

A user named @ludwim_i tweeted: “tether has $187B in reserves, and we’re all just… cool with that? more cash than most banks. less transparency than a telegram group admin.”

The post continued: “70% of crypto trades run on this. zero real audits. ceo with ‘dark vision of the future’ (Fortune quote). This is fine.”

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Tether operates with $187 billion in reserves. That’s more cash than most traditional banks hold. Yet the stablecoin faces minimal regulatory scrutiny compared to U.S.-based alternatives.

Banks’ hard line against regulated stablecoin rewards creates a paradox. They risk pushing users toward the very unregulated option they should fear most.

Legislative Standoff Continues

The Digital Chamber’s Friday document highlighted two reward scenarios worth protecting. Those tied to providing liquidity and fostering ecosystem participation. The group argued that these provisions in Section 404 are especially important for decentralized finance.

The White House called for a compromise by the end of this month. Banks haven’t budged in repeated meetings. Trump crypto adviser Patrick Witt told Yahoo Finance another gathering may be scheduled next week.

“We’re working hard to address the issues that were raised,” Witt said. He encouraged both sides to bend on the details.

Witt called it unfortunate that this became such a big issue. The Clarity Act isn’t really about stablecoins, which were more appropriately the business of the already-passed GENIUS Act.

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What Happens Next

The Senate Agriculture Committee already passed its version of the Clarity Act. That version focused on the commodities side. The Senate Banking Committee’s version deals more with securities.

If the banking panel follows its agriculture counterparts, it’ll advance the bill along partisan lines. But a final bill needs Democratic support to clear the Senate’s 60-vote margin.

The Digital Chamber’s principles document says bankers’ request for a two-year study on stablecoins’ effect on deposits is acceptable. But only if it doesn’t come with automatic regulatory rulemaking in response.

Carbone suggested his industry’s willingness to scrap rewards on stablecoin holdings is a significant concession. The GENIUS Act represents the current law of the land.

“Let’s use a scalpel here to address this narrow issue of idle yield,” Witt added in his Yahoo Finance interview.