Visiting Berlin in 1983, its Wall was a stunning sight. All that effort, all that threatened violence, just to keep people from choosing to improve their lives. We tut-tutted about how sad it was for a government to make its population prisoners.
And yet, here we are in America building a new Berlin Wall around our banks to keep depositors from choosing to move their funds. In 2025, Congress passed the Genius Act, which prohibits interest payments by stablecoins, thereby preventing them from competing with the pittance of interest depositors receive from banks.
The Genius Act was bipartisan and popular, receiving 68 votes in the Senate and 308 in the House. Even the free market-loving Wall Street Journal Editorial Board approved of its prohibition of interest payments on stablecoins.
And the Comptroller of the Currency, Jonathan Gould, who is generally a reliable advocate of economic freedom, published his final rule on stablecoins regulation last month, in which he prohibits stablecoin issuers from getting around the interest prohibition by offering rewards programs.
Gould, however, left a crack in the wall. He allows unaffiliated parties (e.g., platforms where stablecoins transact) to offer rewards on their own. That is a big deal. Imagine two platforms: one offers generous rewards financed by the fees it charges stablecoin issuers to have their stablecoins included on the platform, and another platform offers neither generous rewards nor charges fees. So long as the fees charged to issuers are slightly less than the interest earned on the assets that back the stablecoins, competition will force business to flow to the first platform; issuers will be forced to use it. The crack in the wall is big enough to drive a truck through.
But the Comptroller reassures us that he can change the rule if deposit outflows become large. Consumers are allowed to improve their lot, but only if they don’t improve it too much. How did America’s Congress, its best free-market Editorial Board, and a freedom-loving Comptroller, all become so intent on keeping consumers from moving out of banks?
Part of the story is that incumbent banks don’t want competition, and they aren’t shy about lobbying for political protection. But that isn’t the whole story. It cannot explain why well-intentioned observers support the prohibition.
Central bank advocacy against stablecoins is also important. The Federal Reserve, and other central banks, see their political power as depending on maintaining centralized control of payments. Central bankers hire lots of respectable economists to write studies to influence thinking. They argue that if everyone leaves deposits for stablecoins, maybe the new blockchain-based system won’t work perfectly, and a systemic mishap could create a financial crisis. They tell us that we should be afraid of any payment system that they don’t control.
How strange that the same bankers and officials who worry so much about the un-disprovable risks of technologies that threaten their control have so little to say about large, readily apparent risks of the status quo. The Savings and Loan debacle, the Subprime Crisis, the 2023 bank insolvencies all happened within the system they controlled.
Far-fetched arguments about risk can be made (and reliably are made) by special interests who wish to slow every advance that harms them. Cars are fast and dangerous, and people will die if we switch from buggies, says the buggy-whip manufacturer. Cell phones will give you brain cancer, so stick with your land line. Rock and roll music will cause a wave of teen pregnancies, old school crooners warn. Here is the truth: We benefit greatly from allowing innovation. New technologies carry risks that we will learn about over time and adapt to, as we always have.
A more legitimate concern about financial innovation is that unsophisticated people may be abused by unregulated firms. That is why many of us advocated legitimate regulations of stablecoin issuers (which the Genius Act also requires). Regulators can force issuers to back stablecoins entirely with riskless short-term Treasury bills (a good starting point, if you ask me), and monitor their advertisements to ensure honesty. But there is no reason to “protect” consumers by prohibiting interest!
So far, stablecoins have been used almost exclusively for crypto transactions. Their real promise, however, is as a means of payment for goods and services. Stablecoins, transacted from your cell phone, can be securely transferred via Blockchain at the speed of light, and can pay interest (now only in the form of rewards) at close to the Treasury bill rate.
There are several new ventures positioned to provide that service. For example, a joint venture by Venmo and Paypal, by virtue of its existing customer network, could execute such payments. Despite the fog of uncertainty created by the Comptroller’s rule, let’s hope they and others will demonstrate the benefits of the new technology, which is the prerequisite to disproving the Chicken Little concerns related to systemic risk.
One irony is that the prohibition on interest encourages stablecoins to rely on rewards-paying crypto platforms, which increases security risk. North Korea’s hacking of Binance’s system last month showed that platforms are less safe than the (so far un-hackable) Blockchain system. Unfortunately, a Wall Street Journal Editorial pointed to the recent hack as evidence of stablecoins’ insecurity, instead of seeing it for what it was: an unintended consequence of the interest prohibition they have been supporting.
