Former US Senator Pat Toomey wants the Senate to stop treating stablecoins like they’re banks in disguise. In remarks delivered on August 4, the Pennsylvania Republican pushed lawmakers to pass the Digital Asset Market Clarity Act, commonly known as the CLARITY Act (H.R. 3633), before Congress breaks for its August recess.

The $300 billion question

Toomey pointed to stablecoins reaching an approximate market size of $300 billion as evidence that this asset class has outgrown the “experimental” label. More importantly, he noted that this growth hasn’t come at the expense of traditional bank deposits.

That distinction matters. Banks have been vocal about their concern that stablecoins could siphon away deposits, undermining a pillar of traditional finance. Toomey’s counterpoint draws from history: he compared current banking anxiety over stablecoins to the panic that accompanied the rise of money market funds in the 1970s.

Back then, banks worried that money market funds would drain their deposit base. What actually happened was that the financial system expanded to accommodate both products. Money market funds eventually got their own regulatory framework under the SEC rather than being forced into bank charters. That’s essentially what Toomey has been advocating for stablecoins since at least December 2022, when he introduced the Stablecoin TRUST Act.

From TRUST to CLARITY

The Stablecoin TRUST Act, introduced during Toomey’s final weeks in the Senate, proposed a dedicated regulatory framework for stablecoins under the Office of the Comptroller of the Currency. The bill’s premise was straightforward: stablecoin issuers should have their own set of rules, not ones borrowed from commercial banking.

That bill didn’t make it across the finish line, but its DNA is clearly present in the CLARITY Act. The newer legislation advanced through the Senate Banking Committee on May 14 with a bipartisan 15-9 vote.

The CLARITY Act draws some important lines. It prohibits stablecoin issuers from offering rewards that function like interest on bank deposits. But the bill does allow transaction-based incentives, creating a regulatory distinction between holding rewards (not okay) and usage rewards (fine).

What this means for investors

If the CLARITY Act does pass, a dedicated regulatory framework would likely boost institutional confidence in stablecoin products. If the CLARITY Act creates a federal licensing pathway that sits outside traditional banking charters, it could lower the barrier to entry for new stablecoin issuers while simultaneously giving existing players like Circle and Tether a clearer compliance roadmap.

There’s a risk worth flagging, though. The 15-9 committee vote means nine senators voted against the bill. If the final version of the bill ends up imposing bank-like capital requirements or reserve mandates that mirror existing banking rules, it would undermine the very purpose Toomey is advocating for.

Investors should also watch for how the prohibition on deposit-like rewards interacts with existing DeFi protocols. Some stablecoin yield products currently operate in a gray area that the CLARITY Act could explicitly close. Projects built around stablecoin lending and staking mechanics may need to restructure if the bill becomes law.