Recent reporting highlights the potential of the new CLARITY ACT draft advancing with yield bans on "passive stablecoin balances."
The implication of this has caused Circle's shares to sell-off today, but what impact could this have on DeFi native yields?
Passive balances
The banking system has primary feared that yield on stablecoins will attract every day savers, potentially causing a significant capital outflow since the idea of earning passive income of higher percentage on the same old dollars the banks are cheap with, would come off as a steal for most people.
This fear is reflected on what the reported draft prohibits. And this also gives us some perspective on what broader impact to expect.
A ban on yields on passive balances generally means that stablecoins with active roles can earn yield. The question now would be: what qualifies as an active balance?
Generally, an active balance includes clearly defined risks in some form.
Stablecoins in lending contracts have defined risks associated with potential yield.
Stablecoins in liquidity pools have direct exposure to market risks, hence associated yield would fall outside CLARITY ACT prohibition.
So does this mean ZERO impact?
What DeFi can expect
The decentralized finance ecosystem must understand that although a stablecoin yield ban is not extended to DeFi yields directly since lending, staking and LP yields represent active roles with risks, the government remains interested in regulating (AKA controlling) DeFi.
That said, it is also worth noting that although DeFi native stablecoins yields is not prohibited, the ban on passive balances yield would still have an impact on DeFi, at least in the short term.
This is because although users do not directly deploy stablecoins into active roles, these platforms offering yields most likely have Defi exposures that could be impacted by a ban on yields distributed to passive balances.
That said, in the long term, if the temporary friction can be eased, funds could rotate directly into DeFi, especially through institutional players.
It is also worth understanding that this could potentially push people to go non-custodial. Yields from sources like Coinbase keeps users in centralized systems.
The CLARITY ACT could potentially force adoption of self-custody and active participation in DeFi markets.