WSJ defends CLARITY Act critique, cites $3.3B Circle stablecoin risk

The Wall Street Journal's editorial board defended its critique of the Senate's CLARITY Act, citing Circle's $3.3 billion in uninsured deposits at Silicon Valley Bank as evidence that stablecoin risks extend beyond the credit and liquidity issues the GENIUS Act addressed.

"The crypto industry calls these 'rewards' and says they are no different than airlines travel miles or credit-card cash back," the board wrote. "But the latter are based on a user's level of activity."

The editorial argues the CLARITY Act's language would let exchanges offer stablecoin holders cash back, rebates, and other perks as long as they aren't exclusively based on stablecoin holdings. An exchange could offer 5 percent cash back to stablecoin holders who sign up for a loyalty program and keep a monthly balance of at least $1. The GENIUS Act prohibited stablecoin issuers from paying interest on user balances but didn't extend that ban to exchanges and wallets.

The bill faces opposition from both parties. Senator Josh Hawley said he would block it outright, while seven Democratic negotiators said the July 22 draft fell short. Senator Cynthia Lummis called the coming weeks "likely the last real chance we will have for years to get this right."

The Rewards Loophole

Small banks stand to lose most from this regulatory arbitrage because they rely on interest payments to attract deposits, the board wrote. Wall Street giants don't have to pay as much in interest because they benefit from the government's too-big-to-fail imprimatur. Many stablecoin issuers also hold deposits at large banks, so the giants may benefit from growth in stablecoin holdings as a result of such reward payments.

Circle held $3.3 billion in uninsured deposits at Silicon Valley Bank before the bank failed, causing a run on Circle coins that broke its dollar peg to about 87 cents. The Biden administration ultimately guaranteed all uninsured deposits, including for Circle and other crypto companies. The GENIUS Act mitigated some credit and liquidity risk from stablecoins, but neither it nor the CLARITY Act eliminates broader crypto risk, including fraud, failed internal controls, and cyberattacks. Sam Bankman-Fried's FTX exchange failed because of ineffective internal controls and misuse of customer funds.

Legislative Crossfire

The editorial also took aim at Senator Bernie Moreno, who accused the board of having "descended into a Wall Street special interest group superPAC." The board noted that a crypto industry super PAC spent $40 million supporting Moreno's 2024 election, after which the PAC boasted "Crypto's big bet pays off."

The bill's opponents span both parties. On the right, Hawley cited concerns from Missouri banking and agriculture groups about community bank effects. On the left, seven Democratic negotiators said the July 22 draft fell short, and talks over a government ethics title collapsed in late July.

If the Senate leaves for recess without acting, digital asset regulation defaults to agency discretion. The joint SEC and CFTC interpretive guidance issued in March, classifying more than a dozen digital assets, binds no court and survives no administration that disfavors it. After Loper Bright Enterprises v. Raimondo ended Chevron deference in 2024, agency interpretations of ambiguous statutes command less judicial respect.

The CLARITY Act can serve a useful purpose with some language changes, the board wrote. But the crypto industry and its friends in Washington portray themselves as defenders of free markets while seeking to be quasi-banks without abiding by the same regulations. If the Senate walks away this week, it isn't denying the executive branch anything — it's handing the entire regulatory field to agency discretion.

This article is for informational purposes only and does not constitute investment advice.