Regional banking sector representative Nate Franzen publicly disagreed with Blockchain Association's Summer Mersinger over provisions of the Clarity Act bill. Mersinger had previously characterized concerns about deposit outflows as hypothetical and dismissed them as lobbying rhetoric from large financial institutions. Franzen, representing the interests of small banks in South Dakota, emphasized that regional market participants have been warning about these risks for over a year. In his view, if Congress fails to tighten stablecoin issuance rules, the brunt of the impact will fall on local financial institutions and the communities they serve.
The core of the dispute lies in the mechanics of capital flows. Crypto industry representatives argue that when funds are converted into stablecoins, money does not leave the financial system but is instead transformed into issuer reserves, including bank deposits and Treasury bonds. However, Franzen counters that for a regional bank, losing a stable deposit base directly translates into reduced lending capacity. If a customer moves one hundred thousand dollars into a digital asset backed by government securities, the local bank loses the funding needed to issue loans, and the local economy gains nothing from those reserves, since issuers do not engage in credit intermediation.
The scale of potential consequences is illustrated by the structure of the United States banking system, which comprises nearly 4,500 institutions, the vast majority of which are small local players. In South Dakota alone, regional banks hold approximately $47 billion in deposits that are critical to the agricultural sector and small businesses. According to conservative estimates from the American Bankers Association, the absence of legislative guardrails could result in $4.7 billion flowing into stablecoins, automatically reducing the state's lending capacity by $3.7 billion. This would significantly complicate access to mortgages and business loans for local residents.
Additional concern stems from the lack of coordination between regulatory initiatives. While the GENIUS Act explicitly prohibits stablecoin issuers from paying interest, the current wording of the Clarity Act contains ambiguity that would allow exchanges and wallet providers to offer customers yields similar to deposit returns. Franzen notes that such a loophole may benefit large platforms like Coinbase but would create years of legal uncertainty and put traditional banks at an inherent disadvantage. Digital assets would be able to compete for capital by passing through Treasury yields without bearing the regulatory burden and real-economy financing obligations that characterize conventional banks.
As a compromise, the banker proposes that stablecoins retain the status of a purely payment instrument. User rewards, in his view, should be limited to transactional bonuses similar to credit card loyalty programs, without mimicking interest income. Franzen called on legislators, including South Dakota's senators, to introduce the necessary amendments to the Clarity Act before the final vote scheduled for September. Establishing a level playing field, he said, is essential to ensure that technological innovation does not undermine the ability of regional banks to finance the development of local communities.