Brian Armstrong claims large banks lobbied against paying rewards on stablecoins by arguing it would cause deposit flight from smaller banks. He calls this "misinformation," citing studies showing no correlation and asserting the real motive was to prevent competition from higher-yield stablecoin products.

A key provision in the crypto market structure bill, which could stall its passage, is the debate over allowing third parties to pay yield on stablecoins. Regulators fear this could trigger a mass exodus of deposits from the traditional banking system, while the crypto industry views it as essential for competition.

The banking lobby's opposition to interest-bearing stablecoins isn't just about competition. It's a defense of the century-old regulatory system (capital requirements, deposit insurance) that makes bank deposits safe. Allowing stablecoins to offer similar features without equivalent safeguards introduces systemic risk.

The US banking industry is fighting the proposed crypto Clarity Act over provisions for stablecoins. Banks fear that allowing stablecoin issuers to pay a yield (or "rewards") will incentivize customers to move funds out of traditional deposits, disrupting the banks' core lending model and harming the broader economy.

Addressing criticism, Armstrong clarifies a key difference between stablecoin issuers and banks. Unlike banks that engage in risky fractional reserve lending, regulated stablecoins are required to be 100% backed by liquid assets. This structure prevents a "run on the bank" scenario.

Brian Armstrong critiques the core of modern banking, stating that the fractional reserve system is an insecure foundation that leads to bank runs and government bailouts. He posits that stablecoins, which operate on a 100% reserve model, offer a more stable alternative.

While stablecoins gain attention, tokenized deposits offer similar benefits—like on-chain transactions—but operate within the existing, trusted regulatory banking framework. As they are simply bank liabilities on a blockchain, they may become a more palatable alternative for corporates seeking efficiency without regulatory uncertainty.

Traditional banks separate payment accounts from interest-earning accounts. Brian Armstrong explains that stablecoins combine these functions, allowing users to earn yield on funds they can also spend instantly, disrupting a core banking profit model.

To avoid being classified as a bank, Coinbase's stablecoin model offers "rewards" for user activity like payments or trading, rather than paying interest directly on balances. This is a crucial legal distinction under new regulations allowing them to pass on yield from treasury reserves.