The banking lobby’s bad faith campaign to kill the Clarity Act will backfire

The Digital Asset Market Clarity Act, a major piece of legislation aimed at integrating crypto assets into mainstream economics, faces an uphill battle. Despite months of negotiations and compromise aimed at creating favorable conditions for America, including new business opportunities and minimizing the risk of financial crises like FTX, the bill's future remains uncertain.

The Polymarket currently rates the bill's chances of passage this year at 25%. The bill, known as Clarity, has encountered significant obstacles, with the banking industry's opposition being the primary hindrance.

The banking lobby's interference campaign against Clarity is particularly vicious. Their main concern revolves around the fact that the previous stablecoin law, known as the Genius Act, only prohibits direct interest payments to customers. This leaves room for third-party entities to reward clients who use stablecoins like USDC. Though Clarity was never intended to be about stablecoins, the banks' demands have made it hostage to their demands.

On the surface, it might seem that the banking industry is in dire straits, with dwindling deposits and scarce profits forcing them to seek government protection. However, this perception is misleading. American banks are thriving, with profitability on the rise and a decreased regulatory burden. In fact, the KBW Bank Index has outperformed the NASDAQ over the past year, and the banking sector has amassed a staggering $740 billion in net-interest income last year, dwarfing the GDP of Australia or the combined net income of the Magnificent Seven tech giants.

The banks' claims that they need special legislation to protect themselves from competition are unfounded. J.P. Morgan, a bank that generated nearly $100 billion in net-interest income, would not need to abandon banking altogether if crypto firms earned a few extra dollars on their USDC. The stablecoin industry argues that competition for deposits could weaken the banking industry's ability to create credit, which would harm farmers and small businesses.

Yet, this claim is unsupported by evidence, as banks currently pay no interest to depositors while charging up to 20% on credit card loans. There is no credible academic argument suggesting that direct remuneration to stablecoin holders would lead to a decrease in bank deposits. In fact, stablecoins are a private form of money that eventually integrate with bank deposits, as seen with money market funds, which experienced trillions of dollars in growth despite being fought against by banks using questionable arguments.

The banking lobby has taken care not to mention that banks only account for 20% of credit creation in the U.S., and the largest banks only lend out half of the money they receive from deposits. Additionally, banks are more likely to deposit money with the Fed or buy Treasuries than to provide small business or farm loans. The industry's history of crises, which often necessitate government bailouts, further illustrates the banks' financial stability.

Moreover, savers would likely benefit from competition for deposits since there are more savers than borrowers. However, the trade groups representing the largest banks focus on the notion that stablecoins threaten community banks, despite their "too big to fail" status, which accumulates deposits from all sectors. Banks have also argued against providing FinTechs and crypto firms with equal access to government-run infrastructure, citing safety and soundness concerns.

Despite being responsible for financial crises like Lehman Brothers and Silicon Valley Bank, banks maintain that crypto poses unique risks and enables illicit activities, which is not unique to crypto and occurs in the banking sector as well.

Considering the banking industry's powerful lobbyists and their focus on restricting regulation, especially for stablecoins, it is clear that the industry is not genuinely concerned about competition. These arguments could be applied to implement more restrictive measures on banks, such as capping credit card swipe fees. Ultimately, this situation exemplifies unrequited love, as the industry that once thrived now demands heavy regulation while hiding its true intentions and financial stability.