Why did the Clarity Act cause such a stir in the crypto community?

Author: Prathik Desai; Translator: BitpushNews

Historically, money has rarely been neutral; it inherently possesses an **appreciation attribute**. Long before the advent of modern banking, people expected that holding or lending money should bring returns.

In the third millennium BC, ancient Mesopotamia already had the practice of charging interest on silver loans. From the fifth century BC onwards, ancient Greece used **maritime loans** to finance high-risk maritime trade.

In this system, lenders provided funds for a merchant's single voyage, bearing all losses if the ship sank, but demanding high interest (usually 22%-30%) if the voyage returned successfully. In Rome, interest was deeply embedded in economic life, often even triggering debt crises, making voluntary debt relief a political necessity.

Throughout these systems, one idea remains consistent: money is not merely a passive store of value. Holding money without receiving compensation is the exception. Even with the advent of modern finance, this understanding of the nature of money has been further reinforced. Bank deposits earn interest for depositors. It is generally accepted that money that does not appreciate in value will gradually lose its economic value. It is against this backdrop that stablecoins entered the financial system. Stripped of their blockchain veneer, they have almost nothing in common with any cryptocurrency or speculative asset. They call themselves digital dollars, adapting to a blockchain world that eliminates geographical boundaries and saves costs. Stablecoins promise faster settlements, lower friction, and 24/7 availability. However, US law seeks to **prohibit** stablecoin issuers from paying yields (or interest) to holders. This is why the **CLARITY Act** currently under consideration in the US Congress has become such a highly controversial piece of legislation. Combined with its sister bill, the GENIUS Act, which passed in July 2025, this bill prohibits stablecoin issuers from paying interest to holders but allows for "activity-based rewards." This prompted strong opposition from the banking industry to the current form of the draft legislation. Several amendments, lobbied by the banking industry, aim to completely eliminate stablecoin rewards. In today's in-depth analysis, I'll tell you why the current form of the CLARITY Act might impact the crypto industry and why it has caused such significant discontent within the industry. Now, let's get to the point… Within 48 hours of reviewing the draft by the Senate Banking Committee, Coinbase publicly withdrew its support. “We’d rather have no bill than a bad one,” CEO Brian Armstrong tweeted, arguing that the proposal, which claims to provide regulatory clarity, will only make the industry worse than it is now. Just hours after the largest publicly traded crypto company in the U.S. withdrew its support, the Senate Banking Committee postponed its hearing—which was supposed to discuss amendments to the bill. The core objection to the bill cannot be ignored. The bill aims to treat stablecoins purely as payment instruments, not as any form of monetary equivalent. This is the key point of contention, enough to unsettle anyone expecting stablecoins to revolutionize payments. This version of the bill reduces stablecoins to mere conduits, rather than assets that can be used to optimize capital. As I described earlier, money has never worked this way. By prohibiting interest at the underlying level and banning activity-based rewards for stablecoins, the bill limits stablecoins from achieving yield optimization, which is precisely what they claim to excel at. This is precisely where concerns about competition emerge. If banks are allowed to pay interest on deposits and offer rewards for debit/credit card use, why prohibit stablecoin issuers from doing the same? This tilts the competitive landscape towards existing financial institutions and undermines many of the long-term benefits promised by stablecoins. Brian's criticism goes beyond stablecoin yields and rewards; it also touches on how the bill does more harm than good. He also points out the problems with the decentralized finance ban. The DeFi Education Foundation, a DeFi policy and advocacy organization, has also urged senators to oppose legislative amendment proposals that appear to be “anti-DeFi.” “While we haven’t seen the text of these amendments yet, their descriptions suggest they would severely harm DeFi technology and/or make market structure legislation more unfavorable to software developers,” the organization stated in a post on X. While the CLARITY Act formally recognizes decentralization, its definition is narrow. Protocols under "common control" or that retain the ability to modify rules or restrict transactions risk being subject to banking-style compliance obligations. Regulation aims to introduce scrutiny and accountability. However, decentralization is not static. It is a dynamic spectrum requiring evolving governance and contingency controls to provide resilience, not dominance. These rigid definitions introduce additional uncertainty for developers and users. Secondly, there's a significant gap between promises and policy in the tokenization space. Tokenized stocks and funds offer faster settlement, lower counterparty risk, and more continuous price discovery. Ultimately, they enable more efficient markets by compressing clearing cycles and reducing capital tied up in post-trade processes. However, the current draft of the CLARITY Act leaves tokenized securities in a regulatory vacuum. While not explicitly prohibited, it introduces considerable uncertainty regarding the custody of tokenized stocks. If stablecoins are confined to the payments domain, and tokenized assets are constrained at the issuance stage, the path to more efficient capital markets will be significantly narrowed. Some argue that stablecoins can exist as payment instruments, with yields provided through tokenized money market funds, DeFi vaults, or traditional banks. This isn't technically wrong. But there will always be market participants seeking more efficient ways to optimize capital. Innovation leads to the discovery of workarounds. Often, these workarounds may involve transferring capital overseas. Sometimes, this transfer can even be opaque, in ways that regulators may later regret not anticipating. However, one argument overrides all others and becomes the primary reason for opposing the bill. It's hard not to believe that the current form of the bill structurally strengthens banks, diminishes the prospect of innovation, and stifles industries that could help optimize our current markets. Worse still, it may achieve this at two very high costs. The bill stifles any hope of healthy competition between the banking and crypto industries while allowing banks to profit even more. Secondly, it leaves customers at the mercy of these banks, unable to choose to optimize their returns within a regulated market. These are high costs, and precisely why critics are reluctant to support it. Worryingly, while the bill is packaged as an effort to protect consumers, provide regulatory certainty, and bring crypto into the system, its provisions subtly hint at the opposite. These provisions predetermine which parts of the financial system are allowed to compete for value. While banks can continue to operate within familiar boundaries, stablecoin issuers will feel compelled to exist and operate within a narrower economic framework. But money doesn't like to remain passive. It flows towards efficiency. History shows that whenever capital is constrained in one channel, it always finds another. Ironically, this is precisely what the legislation aims to prevent. To the benefit of the crypto industry, the disagreement over the bill is not limited to the crypto space. The bill still lacks sufficient support in Congress. Some Democrats are reluctant to vote in favor without debating and considering certain proposed amendments. Without their support, the bill cannot move forward even if it ignores the crypto industry's opposition and dismisses it as noise. Even if all 53 Republicans voted in favor of the bill, it would still require at least seven Democrats in the full Senate to pass it by a majority and overcome obstacles. I don't expect the U.S. to pass a bill that pleases everyone. I even think it's impossible and undesirable. The problem is that the U.S. is not just regulating a new class of assets, but attempting to legislate for a form of currency whose inherent properties make it highly competitive. This makes it more difficult because it forces lawmakers to face competition and enact provisions that may challenge existing institutions (in this case, banks). The impulse to tighten definitions, restrict licensing, and maintain existing structures is understandable. However, this risks turning regulation into a defensive tool that excludes rather than attracts capital. Therefore, the criticism of the Clarity Act must be properly understood—it is not an opposition to regulation itself. If the goal is to truly integrate crypto assets into the financial system, rather than simply isolating them, then the rules the US needs to establish should allow new currencies to compete, experiment, and evolve within clearly defined regulatory boundaries. This, in turn, would force traditional financial institutions to improve their competitiveness. Ultimately, legislation that harms what it is supposed to protect is worse than no legislation at all.