Senate Banking Committee members Tillis and Alsobrooks introduced a bipartisan amendment to the CLARITY Act meant to address one of the most pressing issues holding up the bill. While Section 4 of the GENIUS Act prohibits stablecoin issuers from paying yield, it was silent on stablecoin deposits at third-party platforms, like Coinbase. Banks argue that allowing platforms to pay yield is akin to offering a bank account without being subject to bank regulation. Crypto argues that banks are just being anticompetitive.
The Senate compromise has been marketed as preserving the unique service offered by bank savings accounts while allowing crypto narrow latitude to offer distinct products. The statutory text removes all doubt – the crypto industry is the undisputed victor. Crypto intermediaries will be paying yield on customer stablecoin deposits under the CLARITY Act, putting their customers and the economy at risk.
What does the Amendment Actually Say?
The amendment begins unequivocally:
No covered party shall, directly or indirectly, pay any form of interest yield solely in connection with holding…payment stablecoins or on a payment stablecoin in a manner that is economically or functionally equivalent to the payment of interest or yield on an interest-bearing bank deposit.
But the real “clarity” falls apart with the exceptions. The next part of the amendment explicitly permits activity and transaction based rewards and incentives. It sets out a “non-exhaustive list of permissible activity-based or transaction-based rewards or incentives…” Specifically, that list includes:
(i) A transaction, payment, transfer, conversion, remittance or settlement activity, including a rebate or incentive provided in connection with the acceptance or use of a payment stablecoin.
(ii) Providing liquidity for market-making activity, posting of collateral in connection with trading, or otherwise putting assets at credit or investment risk.
(iii) The use of any product or service, including participation in governance, validation, staking or a loyalty, promotional, subscription, or incentive program.
Sealing the deal, the amendment makes it clear that rewards from those activities can be distributed to customers based off their stablecoin balances.
(B) For the avoidance of doubt, payments to restricted recipients of consideration, rewards, or benefits that are permissible pursuant to paragraph (2) and subparagraph (A) may be calculated by reference to balance, duration, tenure, or any combination of the foregoing.
Translation – crypto platforms can use customer stablecoin deposits to generate returns through activities like lending to other customers or institutions, investing in traditional securities, or locking tokens up for staking and market making to name a few. All of these are activities that crypto firms already engage in.
The “Compromise” is to Fully Legalize Stablecoin Yield Payments
As of this writing, Coinbase advertises 10.3% APY for customers who lend their stablecoin balances and claim those can be withdrawn at anytime. They also advertise 14% APY through staking services. While stablecoins themselves generally cannot be staked, they can be pledged toward tokens where staking is available, and those rewards can be distributed to accountholders. Binance.com offers 5.68% on its USDC “Earn” program through “principal protected products.” Crypto.com offers deposits that use customers’ stablecoin on a ‘decentralized finance’ protocol called Aave to provide liquidity and then returns those “passive rewards” to accountholders. All of these activities and more are explicitly permissible according to the exceptions listed above.
The one stablecoin yield arrangement the language does appear to ban is niche and related to an affiliate agreement between Coinbase and the stablecoin issuer Circle. Under that agreement, Coinbase gets half of the profits from the interest Circle’s stablecoin reserves earn as well as incentive payments for distributing USDC on their platform. Under the language, it’s likely that rulemakings would not allow Coinbase to use that pool of profits to fund rewards for their stablecoin accounts.
Where that Leaves Us
The flaw in the ‘compromise’ language isn’t that crypto might eventually jump through loopholes, but that the language codifies that all these versions of stablecoin yield are legal. Worse yet, even though these underlying activities are riskier than those at banks, the GENIUS and CLARITY Acts don’t provide the regulations, supervision or customer protections and government guarantees of a true bank account. Community banks are right to worry – there’s no way they can compete with the interest rates crypto is advertising and their deposits are likely to move. That’s a problem for all of us – community banks are just a sliver of total banking assets but they make about 60% of small business loans and 80% of agricultural land loans. That’s lending that stablecoins, by the very nature of their business, can’t replace.