Coinbase Global, Inc. CEO Brian Armstrong joined other crypto industry executives on Capitol Hill this week in a regulatory showdown between the industry and banking system that could involve trillions of dollars in capital flows.

Banking lobby groups are urging lawmakers to ban crypto exchanges like Coinbase Global, Inc. from offering customer yield products similar to bank interest structures.

"I don't understand why banks are rehashing this issue now, but they should accept fair competition in the crypto space," Armstrong said in an interview on Wednesday.

Coinbase Global, Inc. currently offers 4.1% yield to USDC stablecoin holders, while Kraken exchange provides 5.5% yield for USDC holdings.

Under the recently passed GENIUS Act, while customers cannot earn interest through stablecoins, exchanges are permitted to offer yield rewards.

Banking lobby groups warn that allowing such yield products would lead to massive customer withdrawals from community bank deposits, redirecting funds into stablecoins or other crypto assets.

"If people move deposits from bank accounts to stablecoin investments, this actually undermines banks' ability to continue lending to the real economy, supporting and driving economic growth," said John Court, Executive Vice President of the Bank Policy Institute, an advocacy organization representing banking interests.

The Treasury Borrowing Advisory Committee estimated in an April report that potentially $6.6 trillion could shift from deposits to stablecoins.

Armstrong characterized this narrative as "fabricated risk fearmongering."

"The real purpose behind their raising this issue is to protect $180 billion in profits from payment services," he noted, "This is an operation funded by large banks behind the scenes and has nothing to do with small banks."

After meeting with Senate Republicans, JPMorgan Chase CEO Jamie Dimon stated that while stablecoin yield issues weren't specifically discussed, he emphasized that regulators need to carefully craft related regulations.

"We're not opposed to cryptocurrencies," he said.

The American Bankers Association and state associations requested in an August 12 joint letter that lawmakers "close this regulatory loophole to maintain financial system safety."

Crypto organizations responded days later through an open letter to lawmakers, arguing that banning exchanges from offering yield products "would tilt the competitive landscape toward traditional institutions, especially large banks, which have long been unable to provide competitive returns, depriving consumers of meaningful choice."

Although senators have released multiple drafts of market structure legislation, provisions regarding crypto exchanges offering yield products remain under negotiation.

Wyoming Republican Senator Cynthia Lummis, who participated in drafting the legislation, indicated she believes the matter is settled.

"The GENIUS Act has thoroughly addressed this issue, and I support the compromise reached between banks and the digital asset industry," she said in a statement to CNBC, "I don't think this issue should be reopened for discussion."