Banks, consumer groups push back against stablecoin yield

• Key insight: Banks want regulators to prohibit any economic benefit to stablecoin holders, while crypto companies argue that a flexible approach would benefit consumers.
• Supporting data: Bank groups warn interest yield on stablecoins could trigger trillions in deposits to flee the banking system.
• Forward look: The Treasury Department is considering the feedback as it finalizes GENIUS Act implementation rules.

Banks and crypto firms offered competing visions of whether a recently passed stablecoin bill, known as the GENIUS Act, should allow stablecoin customers to earn interest or rewards on their holdings, with banks arguing that such an arrangement could drain deposits out of the banking system and crypto firms arguing yields on stablecoin would inject needed competition for deposits into the market. 

Banks, joined by state regulatory trade groups and consumer advocates, pressed the Treasury Department to take a maximalist interpretation of GENIUS Act language, which in their view should  ban issuers from paying interest to stablecoin holders by prohibiting any transfers of value to stablecoin holders. This arrangement would enjoin crypto exchanges or other affiliates from offering rewards or some other interest-like equivalent. 

In a comment letter from the Bank Policy Institute, Consumer Bankers Association, American Bankers Association, Financial Services Forum and The Clearing House, the trade groups say the potential for yield could transform the fundamental perception of stablecoins into long-term stores of value, when the banks argue they should remain solely payment or settlement tools.

"Permitting payment stablecoin issuers to provide holders or users of their payment stablecoins with benefits economically tantamount to interest or yield would make these digital assets effectively investment products. That could cause a shift in perception of businesses, consumers and other market participants that would cause them to view payment stablecoins … as a longer-term store of value," the groups wrote. The possibility that increased uptake of payment stablecoins may cause 'deposit flight' from banks has already been recognized, including by the current Comptroller of the Currency."

The bank trades say allowing stablecoins to earn yield would damage banks' role as lenders driving economic activity and cause deposits to flee from the banking system. They also caution that the speed of transactions could lead to instability among issuers, which are not subject to deposit insurance or banklike regulation. To prevent regulatory arbitrage, they recommend treating any payments made by affiliates of a stablecoin issuer as though they were made by the issuer itself. The groups also urged the Treasury to prevent issuers from obscuring yield-based benefits as unrelated customer incentives.

"These new deposits of payment stablecoin issuers could be subject to more rapid withdrawals and could otherwise 'behave' differently from other types of deposits that banks use to fund loans," the trades argued. "Banks therefore may need to treat these deposits differently and less favorably for risk-management purposes [which] could potentially cause a substantial decrease in funds available to support longer-term lending to the real economy."

The trade groups outlined eight recommendations in their letter, including a broad ban on interest payments, subjecting large issuers to federal standards to prevent arbitrage, enforcing strong and consistent anti-money-laundering standards, strongly adhering to the law's ban on large nonfinancial commercial firms to prevent mixing commerce and banking, setting high standards for custody of reserves and aligning consumer protections to similar existing standards.

The GENIUS Act prohibits stablecoin issuers from paying interest or yield on payment stablecoins it issues, but bank industry advocates have argued the law's language leaves open a number of loopholes. Third-party exchanges or affiliates could offer the kinds of rewards that credit card companies give their customers, an incentive that serves a similar purpose to interest payments. Since the passage of the law, banking industry groups have expressed concern that the bill allows nonbanks and tech companies too much freedom to issue stablecoins, saying their presence could divert $6.6 trillion of deposits away from traditional banks, citing an estimate from the U.S. Treasury Borrowing Advisory Committee.

Consumer advocacy group Better Markets in its comment letter broadly agreed with the bank industry's logic, saying, "a number of arrangements currently available in the market appear to sidestep this clear directive from Congress." The group pointed to PayPal's announcement this summer that it would pay a 3.7% annual yield on stablecoins and Coinbase's existing 4.1% annual "rewards" on stablecoins as being in violation of the law. 

"The original idea behind stablecoin issuers was that they would operationalize the concept of 'narrow banks' — or institutions that take little to no credit risk but help support a stable payment System," Better Markets wrote. "Paying interest on stablecoins — whether directly or through backdoors — is anathema to the original purpose of the legislation as articulated by its authors and supporters."

Allowing yield, Better Markets warns, would undermine the legislation's goal of creating narrow payment instruments and give stablecoin issuers advantages over SEC-regulated funds and banks. The group said a draining of deposits away from banks — particularly community banks who are less likely to offer stablecoins themselves — could reduce those banks' capacity to make loans to households and small businesses, resulting in economic stagnation.

"One estimate finds that if the stablecoin market surges to $900 billion, we should expect a $325 billion decline in bank lending," the consumer group wrote. "This estimate assumes that stablecoins do not pay yield, meaning it likely underestimates the potential negative impact on lending absent policymakers' further limiting yield-bearing arrangements."

The Conference of State Bank Supervisors urged Treasury to adopt a broad interpretation of the statute, saying, "any payment made by an affiliate or related third party to a holder of a payment stablecoin should be prohibited if the issuer could not make the payment directly."

CSBS also called for strict limits on issuer activities, saying the scope of "digital asset service providers" under the law should be clarified, emphasizing that the GENIUS Act does not authorize stablecoin issuers to engage in lending, banking or money transmission. 

"Federal regulators should not grant broad authorization for all issuers to engage in all digital asset service provider activities," CSBS' President Brandon Milhorn wrote in the letter. "Instead, federal regulators should only grant digital asset service provider authorities to issuers on a case-by-case basis, calibrating any approval of such activities to the business model, risk profile, and risk management capabilities of the issuer."

CSBS, which represents state regulatory agencies, said the Treasury should also incorporate state authority, allowing flexible certification of "substantially similar" state regimes — even if they go further than, but do not contradict, federal standards. A state regulatory regime can be considered "substantially similar" to the federal framework if it meets or exceeds the GENIUS Act's standards and the state regulator has the capacity to enforce the regime. State regulatory frameworks should also serve as a minimum, not a maximum standard for stablecoin oversight, they say.

"An applicant's choice between a state or federal payment stablecoin regime should reflect its consideration of various factors, including different business models, strategies, and operating conditions," CSBS wrote. "Treasury should not preemptively impose a one-size-fits-all regulatory regime that threatens innovation and choice."

Crypto industry companies, however, focused their comments on the need for Treasury to promote competition, arguing that the GENIUS Act's yield ban should apply narrowly to prevent nominal interest from stablecoin issuers, saying including intermediaries in the ban would gold-plate the original statute and be anti-competitive. 

Crypto exchange Coinbase's letter urged Treasury to interpret the GENIUS Act's yield prohibition narrowly, arguing that it applies only to permitted payment stablecoin issuers themselves and does not prevent affiliate rewards. 

The company said the law explicitly bars issuers from paying "interest or yield" on stablecoins but does not restrict non-issuers from offering "rewards," "loyalty points," or similar benefits. 

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"That prohibition does not extend to non‑issuer intermediaries or any 'indirect' payments," Coinbase wrote. "Treating third‑party rewards or loyalty programs as prohibited 'interest' would rewrite Congress's carefully-drawn lines and conflict with the statute's text and purpose [and] hurt consumers by stripping market‑based incentives that lower payment costs, spur merchant acceptance, and help new users adopt safer, regulated U.S. stablecoins."

Beyond yield, Coinbase emphasized that Treasury should adhere strictly to GENIUS' statutory limits, saying "GENIUS expressly carves out non-financial activity or core technology functions necessary for the operation of a blockchain, such as validators and decentralized protocols."

Circle's comment letter on the GENIUS Act urged the Treasury to create a consistent framework for stablecoins that balances consumer protection, risk management and innovation. They stressed the need for simple, transparent, and enforceable safeguards, including requiring that stablecoins are fully backed with cash and high-quality liquid assets, separate from company operating funds. They argued for requiring regular reports for consumers written in plain English that can reinforce customer confidence that their assets are safe and backed-up, even if an issuer were to fail.

Any token that "walks and talks like a dollar" must face the same obligations as a payment stablecoin, Circle argues, adding that capital requirements should take into account the risk profile of a firm, rather than be pegged to a blunt numerical threshold. 

"Given the conservative composition of reserve assets," Circle wrote. "Risk does not scale directly with circulation and depends disproportionately on operational, technology, and infrastructure risk."

Circle also called for a globally interoperable framework and consistent enforcement that preserves consumer trust. 

"Penalties should be predictable for noncompliant actors, while good-faith efforts should be addressed through narrowly scoped safe-harbor protections," they wrote. "Issuers must maintain tested wind-down playbooks — so if something goes wrong, customers can get their money back quickly and fairly, including across borders."