Wells Fargo CEO Claims the Clarity Act May Harm the Financial System?

Wells Fargo has identified a real risk but provided an explanation that is most beneficial to banks.

Written by: Daii

Imagine a very ordinary action.

You deposit your salary into a bank's checking account. The interest rate the bank offers you is close to zero. Meanwhile, it uses this low-cost funding for loans, buying securities, or keeping it as liquid assets.

Now, another account appears on your phone. It holds stablecoins that can be redeemed at any time for one dollar. The platform also returns part of the treasury bond yields to you. The user experience is almost indistinguishable from internet banking.

Where will the money go? You don't need a PhD in economics to answer that.

This is the core of the warning from Wells Fargo's CEO. The controversy ostensibly revolves around the "Digital Asset Market Clarity Act," but in essence, it concerns something much older: who is qualified to absorb the public's cash balances and who can take the interest spread generated from that money.

Banks claim this is related to financial security. They are not wrong.

But they are only telling half the story.

The other half is that banks are also defending their cheapest, most stable, and most profitable raw material—retail deposits.

1. First, Distinguish Between the Two Laws

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The media's claim that "the Clarity Act allows interest on stablecoins" is not precise.

The House version of the "Digital Asset Market Clarity Act," H.R. 3633, primarily aims to delineate the jurisdiction of the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission over digital assets, establishing a regulatory framework for the issuance, trading, and intermediaries of digital commodities. It is not merely a stablecoin law.

The rules for issuing stablecoins mainly come from the "GENIUS Act" passed in 2025. This law requires payment stablecoins to be fully backed by high-liquidity assets such as cash and short-term U.S. Treasury bonds, and sets requirements for redemption, disclosure, and regulation. It also prohibits compliant issuers from directly paying interest or returns simply because users hold, use, or redeem stablecoins.

The controversy lies in the boundaries.

If issuers cannot pay interest, can trading platforms, wallets, or affiliated companies offer "rewards"? If rewards are calculated based on balances and holding time, what is the economic difference from interest? Subsequent negotiations around market structure legislation attempt to address this boundary. Banks want to extend the ban to exchanges and other service providers. The crypto industry argues that cashback, membership rewards, trading incentives, and interest should not be treated the same.

Therefore, what Wells Fargo is truly concerned about is not that "Bitcoin suddenly falls out of SEC jurisdiction." They are worried that a certain type of platform gains the ability to absorb deposits without bearing the same level of capital, liquidity, deposit insurance, and ongoing prudential regulatory obligations as banks.

This concern is valid.

To directly package it as "as long as stablecoin rewards exist, the financial system will be harmed" is clearly an overstatement.

2. The Real Risk Is Not High Interest Rates, But Mismatched Terms and Commitments

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Stablecoins themselves do not create systemic risk just because their yields are high.

Risk arises when three conditions occur simultaneously: the public believes it is equivalent to cash; the operator promises that it can be redeemed at face value at any time; and the assets supporting this promise cannot be liquidated without loss under stress.

This is a typical run structure.

A hundred people usually do not redeem, and the platform appears unassailable. Once everyone wants dollars at the same time, the maturity of reserve assets, custody arrangements, settlement speed, and legal ownership will all be put to the test. If there is even a slight delay in redemption, and market prices fall below one dollar, panic will accelerate redemptions.

The Financial Stability Board thus emphasizes that global stablecoins must have effective stabilization mechanisms, clear redemption rights, sound risk management, and cross-border regulatory arrangements. The Federal Reserve has also pointed out that stablecoins lacking sufficient backing and transparency could face destructive runs, transmitting stress to payment systems and asset markets.

This is not a story made up by banks to scare people.

But it is also not a unique original sin of stablecoins. Money market funds, shadow banks, and banks themselves can all experience runs. The difference is that banks typically have deposit insurance, central bank liquidity tools, and a complete set of resolution mechanisms behind them. Whether stablecoin arrangements can obtain similar firewalls depends on legal design, not on whether they have the word "coin" in their name.

3. Deposit Outflows Will Hurt Banks, But That Does Not Mean Money Disappears from the Financial System

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One of the most commonly used arguments by banks is: after stablecoins offer yields, residents will move their deposits away. Banks lose stable funding and can only reduce loans or raise loan rates. The real economy ultimately pays the price.

The first half of this reasoning holds.

Cheap retail deposits are indeed an important source of financing for banks. If a customer of a bank transfers ten thousand dollars to purchase stablecoins, that bank may lose ten thousand dollars in deposits. It needs to sell assets, borrow wholesale funds, or raise deposit rates to attract the money back. The marginal cost of financing rises, which may indeed be transmitted to loan prices.

The pressure on small and medium-sized banks is usually more concerning. Large banks have richer wholesale financing channels, stronger brands, and payment networks. Regional banks rely more on local deposits. If funds quickly migrate to a few national platforms, the first to be squeezed may not be Wall Street giants, but banks that provide relationship loans to local small businesses.

But banks often deliberately skip the second half.

After customers purchase stablecoins, dollars typically do not evaporate into thin air. Issuers use the received dollars to buy short-term Treasury bonds, overnight repo assets, or deposit cash in custodial banks. The more accurate change in funds is from a bank's retail liabilities to the reserve assets of stablecoin issuers, which then convert into deposits, repo financing, or U.S. government liabilities at another bank.

This is not "the whole system has less money."

This is a change in the liability structure of the financial system.

The change can still have serious consequences. Banks lose sticky retail funds, while the stablecoin system that gains funds may concentrate assets in the short-term Treasury market and a few custodial institutions. Normally, this will expand the demand for Treasury bonds. In times of stress, it may also lead to highly synchronized redemptions and asset disposals.

Therefore, what truly needs to be studied is the speed of migration, reserve allocation, and the cost of alternative financing for banks. One cannot take a shocking "potential total deposit outflow" and directly treat it as already occurring credit contraction. Statistically assuming that every dollar of stablecoin growth will permanently eliminate a dollar of bank financing turns asset-liability analysis into a promotional poster.

4. What Banks Are Most Reluctant to Admit Is That Stablecoins Expose Deposit Interest Spreads

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Why are banks so concerned about "rewards"?

Because the business model of stablecoin issuers is very straightforward. They receive one dollar and hold around one dollar of high liquidity reserves. The short-term Treasury bonds in the reserves can generate yields. If the issuer or platform returns part of the yield to users, users can see the real opportunity cost of their cash balances.

Traditional banks operate differently. Bank deposits are not a bag of sealed Treasury bonds. Banks bear credit creation, term transformation, payment services, and compliance costs, as well as capital constraints. Therefore, one cannot simply demand that the interest rate on checking deposits equals the yield on Treasury bonds.

But this does not mean that all the interest spread retained by banks is a sacred buffer for financial stability.

Part of it is the rent derived from the deposit charter. Customers keep their money in low-interest accounts for a long time due to payment convenience, inertia, insurance protection, and switching costs. The weaker the market competition, the less incentive banks have to pass on market rates to depositors.

Stablecoin rewards truly hit this profit margin.

This also explains why "banning all third-party rewards" is not a neutral safety rule. It not only reduces the incentive for runs but also directly prevents a product from competing with banks for cash balances. If regulators accept all of banks' claims, it would mean maintaining low-interest deposits for banks in the name of financial stability.

This does not protect consumers.

This protects the existing cost of liabilities.

The Bank for International Settlements' criticism of stablecoins carries weight: stablecoins rely on sovereign currencies as a pricing basis but may have defects in unity, elasticity, and governance. However, this set of criticisms supports strict regulation and public currency anchors, and does not automatically lead to the conclusion that "platforms must not share reserve yields with users." Jumping from reserve risk to yield bans lacks a necessary causal chain that must be proven.

5. The Most Dangerous Thing Is Not the Rewards, But the Disguise of Three Products as One

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What regulators should really prohibit is confusion.

The first product is payment stablecoins. They promise stable face value, reserves should be safe, short-term, and kept separately, and provide users with clear redemption rights. They pursue payments and should not rely on high-risk investments to generate yields.

The second is investment products. Users are willing to take on money market, credit, or term risks in exchange for yields. They can exist but must disclose assets, risks, and loss-bearing order, and cannot masquerade as risk-free cash.

The third is platform subsidies. Platforms provide cashback from their marketing budgets or rewards based on trading or consumption behavior. These rewards may not necessarily relate to holding balances and may not form financing relationships similar to deposits.

If the law only looks at the two words "rewards," it will crudely shove three things into one pocket.

This will produce two bad results.

On one hand, real interest can be renamed as points, cashback, or loyalty rewards, bypassing the ban. The rules only constrain the most honest companies.

On the other hand, normal cashback and trading incentives may also be mistakenly harmed. Regulation eliminates competition for existing banks without reducing reserve risks.

The correct boundary should look at economic substance: whether rewards accumulate based on balances and time; whether funds are used by the platform for financing; whether users are promised stable principal; whether yields come from safe reserves, risk investments, or subsidies; whether assets are isolated from creditors in the event of platform bankruptcy; and whether users can redeem directly, timely, and at face value.

Payments based on balances and time, conditioned on holding funds, are interest-bearing products. The law should positively recognize them and then decide what licenses, disclosures, liquidity, and consumer protection rules apply. Escaping regulation by changing names should not be allowed. Similarly, banning all rewards by expanding definitions should not be allowed either.

6. What Will Truly Harm the Financial System Is Regulatory Mismatch

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The worst system is not allowing stablecoins to compete.

It is allowing them to enjoy user perceptions "like deposits" without bearing the core constraints of deposit products.

If platforms can promote stablecoins as cash substitutes, pay yields based on balances, and invest reserves in long-term securities, corporate bonds, or related party assets, then banks' warnings are entirely correct. This structure creates profits in good times and shifts liquidity risks to users and markets in bad times.

Conversely, if stablecoins must hold cash and ultra-short-term Treasury bonds, reserves are legally isolated, disclosed daily or frequently, subject to independent audits, establish clear redemption timelines, and prohibit re-pledging of reserve assets, then they are not the same as highly leveraged shadow banks. At this point, merely because they allocate yields to users does not provide sufficient evidence to assert that the financial system is less secure.

Regulators should focus on four things: what reserves are, who owns the reserves, how redemption occurs under stress, and who bears losses in the event of failure.

As for whether yields exist, that is a secondary issue.

My conclusion is very clear

Wells Fargo has pointed out a real risk but provided an explanation that is most beneficial to banks.

If stablecoins absorb large amounts of publicly redeemable funds, it will indeed change the financing structure of banks. It may increase funding costs for some banks. It may also concentrate liquidity risks on stablecoin issuers, custodial banks, and the short-term Treasury market. Without redemption rules, asset isolation, and stress resolution mechanisms, this migration cannot be allowed simply because of the phrase "technological innovation."

However, banning platforms from providing any yields to holders is not an answer that necessarily follows from these facts.

A more reasonable system is for similar activities to bear similar constraints. If promising face value redemption, one must hold truly redeemable assets. If paying interest based on balances and time, one must accept regulation for interest-bearing financial products. If doing marketing cashback, one must prove that the rewards do not risk customer reserves. If large enough to impact payment and Treasury markets, one must increase liquidity, operational, and resolution requirements.

Banks should also accept competition. They cannot earn market returns using near-zero-cost deposits while demanding Congress to prohibit others from returning yields to depositors, then package this as public safety.

What the Clarity Act truly needs to prevent is not money leaving banks, but risks leaving regulation.

Because financial security has never been about guaranteeing that old players can continue to access cheap money, but about ensuring that anyone who takes public money can afford the cost of their commitments.

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