Section 404 of the CLARITY Act contains a narrow, technical carve-out that has become the most consequential battleground in stablecoin regulation. The provision prohibits interest-equivalent yield on payment stablecoins—a standard guardrail designed to prevent them from functioning as unregulated bank deposits—but includes a critical exception for transaction-based rewards. This specific mechanism has drawn the ire of 78 banking groups, including the American Bankers Association (ABA) and the Independent Community Bankers of America (ICBA).
The exception permits issuers and distributors to route returns to holders as long as the payment is labeled as a reward for activity rather than a return on capital. This creates a path for stablecoins to replicate the economic function of interest-bearing deposits without the corresponding regulatory burden. The banking lobby is not merely fighting the existence of stablecoins; they are targeting a specific regulatory loophole that allows these assets to bypass the traditional banking perimeter.
The OUSD consortium and similar pass-through yield models utilize this exact mechanism to distribute returns. In these architectures, yield is not paid directly by the issuer as interest. Instead, it is routed through distributors, effectively bypassing the traditional banking perimeter. When paired with the Visa Stablecoin Platform (VSP) infrastructure, which facilitates the integration of these assets into payment rails, the model becomes a potent competitor to traditional bank deposits.
The banking lobby’s concern is that this structure facilitates massive deposit flight, moving capital from regulated bank balance sheets into stablecoin ecosystems that operate under a different, and arguably lighter, regulatory regime. They view this exception as a regulatory gap that threatens the stability of the deposit base, and they are acting to close it before the legislative window shuts.
If the transaction-based rewards exception is tightened or removed, the economic viability of these models faces a structural constraint. The OUSD consortium’s yield model relies on the ability to distribute these returns seamlessly. If the law forces a stricter interpretation of what constitutes a reward versus interest, the friction involved in distributing that yield could increase significantly, potentially rendering the model less attractive to users.
Similarly, the economics of the Visa Stablecoin Platform, which relies on the integration of these yield-bearing assets, would be forced to adapt to a more restrictive environment. The banking groups are front-running the legislative process because they understand that the difference between a compliant stablecoin and a deposit substitute lies in the fine print of how yield is defined and delivered.
The political timeline is accelerating. The merged text of the CLARITY Act is expected to drop the week of July 20, with a Senate floor vote targeted for the same week. The math in the Senate is tight, with 60 votes required for cloture and Republicans currently estimated to be about seven votes short. This narrow margin gives the banking lobby significant leverage to demand changes to Section 404 before the bill reaches the floor.
The House is also engaged, with a hearing on stablecoins scheduled for July 17, 2026, providing a public forum to air these concerns before the Senate text is finalized. The banking lobby’s aggressive stance is a calculated effort to force a compromise on this specific provision. By framing the transaction-based rewards exception as a systemic risk to the banking sector, they are attempting to build a coalition that transcends traditional partisan lines.
Whether this strategy succeeds depends on how much weight Senate leadership places on the concerns of the banking industry versus the desire to establish a clear regulatory framework for stablecoins. The outcome will define the competitive landscape between traditional banking and the emerging stablecoin-based payment infrastructure for years to come.
Watch for any signals that the transaction-based rewards language is being revisited as the House hearing unfolds and the Senate prepares for the text drop. If the final text includes a tightening of this exception, it will signal a victory for the banking lobby and a potential pivot point for the stablecoin industry’s growth model. If the exception remains, it will confirm that the current pass-through yield models have a clear path forward, though they will likely remain under intense regulatory scrutiny. The legislative response will determine whether stablecoins are allowed to evolve into a new form of digital deposit or if they will be strictly confined to their role as payment instruments, stripped of the yield-bearing features that currently drive their adoption.