Proposed compromises to a yield ban and concerns of a $6.6 trillion deposit flight could save CLARITY Bill. Can it work?

The Digital Asset Market Clarity Act (CLARITY Act) is at a standstill as Coinbase retracts its support and banking industry concerns grow. This deadlock has prompted the White House to consider withdrawing its endorsement, which could jeopardize the bill’s progress toward a Senate vote before the 2026 midterm elections. Central to the dispute is the issue of stablecoin yields: crypto supporters, including Coinbase, are advocating for incentives like staking and rewards to encourage adoption. However, banks caution that unregulated yields may lead to a mass exodus of deposits, undermining their lending capabilities and threatening financial stability.

Organizations such as the American Bankers Association (ABA) and the Independent Community Bankers of America (ICBA) reference Treasury Department figures suggesting that up to $6.6 trillion in deposits—roughly 30-35% of all U.S. commercial bank deposits—could shift to yield-bearing stablecoins. They argue this could decrease community bank lending by $850 billion, as banks depend on low-cost deposits to finance loans for small businesses, households, and agriculture. Bank of America CEO Brian Moynihan has warned that stablecoins might “reduce lending capacity and increase borrowing costs” if yields present unfair competition against regulated deposits.

The current CLARITY draft aims to curb yields entirely, banning passive rewards while permitting limited activity-based incentives. This could alienate the crypto sector and stifle innovation. Coinbase CEO Brian Armstrong has criticized the draft as “materially worse than the status quo,” pointing to restrictions on tokenized equities, decentralized finance (DeFi), privacy, and stablecoin rewards, which generated $355 million in revenue for the exchange in the third quarter of 2025.

A solution requires a delicate balance: allowing yields and staking, as supported by Coinbase, while enabling community banks to participate without losing earnings. This could involve introducing fractional reserves (transitioning from 1:1 to 4:1 over three years to mitigate risks), mandating segregated stress tests for compliance, and implementing an industry-wide on-chain interoperability and clearing layer. This layer would ensure that stablecoins from various banks are seamless for users—similar to how consumers are indifferent to the issuing bank of their debit card.

Tokenized deposits could serve as a vital link, acting as bank-specific digital representations of deposits with fractional reserves, interest, and deposit insurance. To function effectively, they must integrate with the interoperability layer for cross-bank functionality. Such a framework would maintain community bank earnings by keeping deposits within the system while driving modernization and competition in digital finance.

Critically, periodic stress tests and proof-of-reserves mechanisms must be integrated into regulatory disclosures, filed through a system administered by the SEC under newly designed disclosure models. This system, as proposed by Auditchain Labs AG—would leverage structured, machine-readable formats like XBRL to ensure transparency, real-time verifiability, and alignment with U.S. capital markets standards that have long been the envy of the world.

Below, we propose two alternative compromises, each incorporating these elements while addressing the $6.6 trillion deposit flight risk through calibrated safeguards.

Alternative 1: Tokenized Deposit-Centric Model with Phased Fractional Reserves

This approach prioritizes tokenized deposits as the primary vehicle for banks to enter the stablecoin space, leveraging existing banking authority under the GENIUS Act (which excludes tokenized deposits from stablecoin rules). Community banks could issue tokenized deposits—digital claims on insured fiat deposits—while introducing limited fractional reserves to preserve lending without excessive risk.

Fractional Reserves: Start with full 1:1 backing in Year 1, phasing to 4:1 over three years (e.g., 2:1 in Year 2, 3:1 in Year 3, reaching 4:1 by Year 4). This gradual implementation allows banks to lend a growing portion of reserves, offsetting any deposit migration by generating new revenue streams. Reserves must be held in high-quality liquid assets (HQLAs) like U.S. Treasuries and insured deposits, with real-time on-chain proof-of-reserves.

Yields and Staking: Align with Coinbase’s position by permitting activity-based yields (e.g., 3.5-4.5% APY for transactions or DeFi participation) and limited passive staking rewards, capped at levels competitive with savings accounts (e.g., 2% APY). Yields would be funded from bank lending profits, ensuring no direct competition with uninsured stablecoins.

Interoperability and Clearing Layer: Mandate an industry led on-chain clearing layer that enables atomic swaps and seamless transfers across bank-specific tokenized deposits. Users could hold a “universal” digital wallet view, agnostic to the issuing bank, with automated routing for optimal liquidity—protecting consumers from bank-specific failures via shared resolution mechanisms.

Stress Tests and Compliance: Require quarterly segregated stress tests (modeled on Federal Reserve scenarios) to verify minimum reserve compliance under volatility shocks, with results disclosed publicly. Tests would simulate $6.6 trillion outflows, ensuring banks maintain phased ratios. Programmable compliance (e.g., smart contracts halting yields if ratios dip) adds enforcement. Proof-of-reserves audits, conducted monthly via blockchain attestations, must be included in new regulatory disclosure models as proposed by the new XBRL US Digital Asset Working Group recently initiated by Auditchain Labs. This ensures machine-readable, verifiable reporting for stakeholders.

Impact on Banks: Zero earnings erosion—banks retain deposits as tokenized versions stay on-balance-sheet, enabling new fees from digital services (e.g., 24/7 cross-border payments). This modernizes community banks, allowing competition with crypto natives without cannibalizing core lending.

This model minimizes deposit flight by keeping funds within regulated banking, potentially recycling $6.6 trillion into tokenized forms that boost liquidity without disintermediation.

Alternative 2: Hybrid Stablecoin Framework with Phased Fractional Integration

For a more ambitious path, this hybrid blends stablecoin issuance with tokenized deposits, allowing banks to issue regulated stablecoins while gradually introducing fractional elements. It addresses Coinbase’s yield demands through broader incentives while using interoperability to shield community banks.

Fractional Reserves: Begin with 1:1 backing in Year 1, transitioning to 4:1 over three years (e.g., 2:1 in Year 2, 3:1 in Year 3, full 4:1 by Year 4), conditioned on successful stress test performance. Fractional portions must fund community lending (e.g., small-business loans), directly countering the $850 billion lending reduction fear. Reserves blend HQLAs with tokenized assets for flexibility.

Yields and Staking: Fully adopt Coinbase’s advocacy—allow passive yields (up to 3% APY for holdings) and staking rewards tied to DeFi network participation. Banks could offer these as “enhanced deposits,” with yields sourced from fractional lending income, creating a revenue-neutral model.

Interoperability and Clearing Layer: Build on the model in Alternative 1 above but extend to a “universal stablecoin rail” via shared blockchain infrastructure (e.g., Ethereum Layer 2). Bank-issued stablecoins and tokenized deposits would interoperate via a central clearing entity (e.g., a Fed-supervised hub), enabling DvP settlements and automatic failover to another bank’s reserves during high stress events. Users experience a single, pegged asset, indifferent to origin—mitigating risks from individual bank failures.

Stress Tests and Compliance: Implement quarterly segregated stress tests, focusing on interoperability resilience (e.g., simulating network congestion or $6.6 trillion shifts). Minimum compliance requires 100% redemption guarantees, with automated haircuts on yields during stress. Proof-of-reserves, verified through on-chain attestations, must accompany stress test results in disclosures filed with the SEC’s proposed XBRL-administered system, championed by the XBRL US Digital Asset Working Group in Alternative 1 above. This structured format enables automated oversight and analysis.

Impact on Banks: Earnings neutrality achieved by channeling fractional reserves back into lending, potentially increasing net interest margins. Community banks gain access to crypto yields without losing deposits, fostering competition through shared infrastructure .

This hybrid reduces flight risks by capping fractional elements initially, recycling potential outflows into bank-issued stablecoins that support lending.

Clarity Through Compromise and Enhanced Disclosure

Either alternative could salvage the CLARITY Act by addressing the White House’s call for consensus—protecting against $6.6 trillion deposit erosion while enabling yields, staking, and innovation. By mandating interoperability, these frameworks ensure consumer safety and bank competition, transforming potential threats into opportunities. As Senate committees regroup (with Agriculture eyeing January 27), incorporating these elements could secure bipartisan support, preventing gridlock and cementing U.S. leadership in digital finance. The key? Pairing rules with verifiable transparency—leveraging new SEC disclosure models as proposed by Auditchain Labs – XBRL US initiatives to build enduring trust.