- Key insight: Banks are dealing with a myriad of complicated arrangements between third parties, stablecoin issuers and crypto exchanges that make banning stablecoin yield much more difficult.
- Forward look: The Senate Banking Committee's version of market structure legislation is in limbo as bank and crypto firms argue about yield language.
- What's at stake: Banks are lobbying for blanket bans on yield-like rewards for stablecoin holdings, fearing deposit flight from traditional financial institutions.
WASHINGTON — The banking industry's campaign to stamp out yield payments on stablecoins is running into a fundamental problem: Even if lawmakers ban the most obvious loopholes, the underlying economics of the industry mean that new workarounds will quickly replace the old ones.
As the Senate Banking Committee and Senate Agriculture Committee prepare to mark up crypto market structure legislation, banks have
The issue
"That's what banks are worried about, is losing those customers, losing deposit base, particularly the smaller and one size ones," said Justin Schardin, vice president of financial services at CFRA Washington Analysis.
Legal scholars tracking the debate say that banks seem not to have grappled with how many different arrangements stablecoin issuers can employ to create yield-like rewards for holders. The real challenge, they say, is in the intricate web of commercial relationships between stablecoin and crypto firms, who all have incentives to attract new customers to the stablecoin ecosystem.
"Unless you basically say that stablecoins are sterile and there can't be any investment return on them at all — beyond simply returning principal — somebody's going to figure out a way to offer yield," said Art Wilmarth, professor emeritus of law at George Washington University. "How do you draw distinctions between interest, yield, reward, inducement? We know that kind of verbiage is so easily arbitraged, unless you adopt a really simple rule — which is to say, there is no investment return on stablecoins, period."
But that kind of language in the stablecoin bill isn't on the table. The market structure bill that was set to be marked up in the Senate Banking Committee included a provision prohibiting crypto firms from offering rewards tied to stablecoin holdings, while carving out exemptions for certain membership or incentive programs.
Independent Community Bankers of America President and CEO Rebeca Romero Rainey told American Banker last week that the group wants a full ban on the payment of interest in yield that applies not just to stablecoin issuers, but also to the exchanges, third parties and affiliates.
"I think that's where some of the conversation the last couple of days has been is, 'Who does this apply to?'" Rainey said. "And is the prohibition just on transaction activity, or is it on the holding of the actual stablecoin?"
While banks and crypto firms and Congress debate customer rewards from exchanges and issuers, the payments that issuers and exchanges make to each other are already raising questions of the efficacy of the yield bans already enacted in the GENIUS Act, which goes into effect in January 2027.
Lee Reiners, a lecturing fellow at the Duke Financial Economics Center who focuses on cryptocurrency, has published
Reiners' paper hinges on whether Coinbase — which custodies USDC on behalf of its customers — qualifies as a "holder" under the law.
"The arguments that the crypto industry basically makes are, 'Not your keys, not your coin,'" Reiners said.
Given how Coinbase structures its custody arrangements, Reiners contends the exchange holds the stablecoins on behalf of customers.
"Everyone's talking about Coinbase's payment to their customers," Reiners said. "They're not talking about Circle's payment to Coinbase."
This is the whac-a-mole problem in miniature: If the law bans direct payments to customers, yield simply flows through a different channel, from issuer to exchange to customer. If regulators agreed with Reiners' interpretation and enforced existing law against Circle paying Coinbase, the economic incentive structure would collapse — Circle would have no reason to pay Coinbase, and without that revenue stream, Coinbase would be unlikely to fund customer rewards from its own pocket.
But even if Congress writes language explicitly banning that arrangement, Wilmarth argues the underlying economics will simply push the payments elsewhere.
"That's exactly what the banks want to stop," Wilmarth said. "They say, 'OK Coinbase, you're not the issuer, and, yes, you're not the custodian, either. You're not the holder, but you're [the] platform and you're providing an inducement reward to these people."
Going forward, the markup delay has lowered any kind of market structure bill's chance of passing through the Senate, but not stopped it entirely. Democratic lawmakers have tried adding riders to the bill that would prevent President Donald Trump or his family from profiting off their crypto ventures while in office, and if Democrats insist on such a measure in the legislation, it may leave both sides without a path forward.
The Senate Agriculture Committee will hold its own markup on Thursday, but that will not include measures on which the bank lobby has focused throughout the market structure debate.
"If the ethics language is a red line for Democrats, I don't see how that gets done, because I think meaningful ethics restrictions are not something Trump is going to sign," Schardin said. "Senate Banking could go ahead with a partisan markup, like the Ag Committee is planning to do, and then either try to fix it in the markup or fix it on the floor with some sort of manager's package if they just want to move the trains along."
