Cryptocurrencies, like stablecoins, have left many in the financial world, from major banks to customers, scratching their heads. It’s not just because few people understand how things like tokens work, but because regulations governing digital assets have further muddied the waters. And amid this confusion, consumers lose out.

There are traditional financial products or services with one set of rules. Then there’s an entirely different set of rules for functionally similar products and services on the blockchain.

Take the Genius Act. Passed in July 2025, it barred stablecoin issuers from paying interest — unlike bank deposits, which do pay interest. Exchanges promptly began paying rewards to get around this rule, and those payments looked and felt like interest payments to customers.

Now the contentious Clarity Act is working its way through Congress. One reason for the contention is the debate over whether to fully extend a prohibition on these quasi-interest payments to exchanges and affiliates, in addition to stablecoin issuers.

Some crypto-supporters say restricting yield on stablecoin would kneecap a young market. Small bank advocates say the prohibition is necessary to prevent a deposit drain because they attract customers with interest rates higher than the big banks. They argue the current prohibition in the bill contains gaping loopholes that would still allow quasi-interest in practice.

The real problem is that the government has created two different regulatory frameworks for similar products. If a customer hands a financial firm his or her dollars, and the firm gives that customer a tradeable receipt for those dollars, it shouldn’t matter whether the transactions are happening on a bank ledger or the blockchain.

Regulation should focus on what a financial product does, the purpose it serves, the function it performs, not the technology used to build it. Neither Genius nor Clarity fully honor this principle, instead sorting similar financial instruments by their respective technologies, not their function.

The result is a hodgepodge of convoluted rules from an alphabet soup of government entities like the CFTC, the SEC, the FDIC, the Federal Reserve, and more. The current fight over something as seemingly simple as stablecoins paying interest is a consequence of regulatory arbitrage.

That needs to be fixed for the sake of the finance industry broadly but also for customers specifically. This kind of artificial arbitrage opportunity only benefits industry insiders. Smaller market participants like community banks, crypto startups, and individual depositors don’t have lobbying budgets to get advantageous classifications from regulators.

The answer is to have like products under the same regulatory umbrella, so everyone plays by the same rules. But that principle of fairness should be paired with freedom.

In other words, regulators shouldn’t take the most overburdensome rules from one product and apply them universally. Instead, the least burdensome, freest, most efficient, and therefore most competitive rules should be universalized.

Neither traditional industry nor new entrants should get a lower standard than the other. If bureaucrats lower regulations on one industry without reducing them for their competitors, then the market will respond with malicious compliance.

A great example is Regulation Q, part of the Banking Act of 1933, which barred banks from paying interest on demand deposits and even capped interest for savings accounts. While inflation was relatively tame, people didn’t care much, but when inflation hit double digits in the 1970s, depositors realized they were paying a steep implicit tax on idle money in the bank.

Cash then flooded into money market funds, an instrument that existed in part because it could function like a deposit without being legally classified (and therefore regulated) as a deposit. By late 1982, these funds had ballooned to more than $200 billion and Congress spent the next three decades dismantling the regulation.

When rules become more burdensome and costly, there’s less compliance. Disparate regulatory treatment is therefore best reconciled by making everyone play by the least harmful and most effective rules, not extending existing overreach from one place to everywhere else.

Whether it’s rules on interest, capital requirements, or liquidity, everyone should compete on a level playing field that is as free as possible. Labels like “digital commodity,” “ancillary asset,” and “payment stablecoin” shouldn’t confer special treatment if products are functionally equivalent; financial instruments should be ruled by their economics, not their nomenclature.

Boundary-based market structure guarantees permanent lobbying warfare over where the boundaries sit. Function-based parity delivers the certainty all sides claim to want. Stablecoins may prove a real improvement in how dollars move, or a marginal technology with isolated benefits. The only way to find out is to let them compete on equal terms.

If tokenized dollars are faster and cheaper, they'll win and consumers will benefit. If not, they’ll lose. The outcome shouldn’t be determined by which industry insiders have better lobbyists. A financial product deserves to survive because customers choose it, not because Congress shelters it.

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E.J. Antoni, Ph.D., is chief economist at the Heritage Foundation and a senior fellow at Unleash Prosperity.

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