A New Hurdle for Stablecoin Legislation: Yield Restrictions Take Center Stage

A bipartisan Senate proposal aims to curb stablecoin yields, sparking debate over the line between crypto rewards and traditional banking interest.

"No covered party shall, directly or indirectly, pay any form of interest on yield... to a restricted recipient solely in connection with the holding of such restricted recipient's payment stablecoins."

A new section of the proposed Digital Asset Market Clarity Act, released by U.S. Senators Thom Tillis (R-N.C.) and Angela Alsobrooks (D-Md.), would prohibit stablecoin issuers from offering yield based solely on holding stablecoin reserves. The text argues that depository institutions provide "financial services integral to the American economy," and that stablecoin issuers offering similar services may inhibit these institutions.

While this agreement has removed one obstacle to a Senate Banking Committee markup, several other negotiation points remain unresolved.

Legislative Action and Reactions

Senators Alsobrooks and Tillis have been negotiating details since a January markup was postponed. In March, they announced an agreement that blocks crypto firms from offering yield that resembles deposit interest, but allows rewards programs that do not directly compete with banks.

Coinbase CEO Brian Armstrong posted a succinct "Mark it up" on social media platform X. Coinbase's chief legal officer, Paul Grewal, stated that the language "preserves activity-based rewards tied to real participation on crypto platforms and networks," adding that the company is "satisfied that this language should not be the basis of any objection."

Cody Carbone, CEO of The Digital Chamber, welcomed the release as an important step toward a markup.

This development follows a pattern of delays. The US Senate Banking Committee previously postponed its discussion of the digital-asset bill shortly after Coinbase Global Inc. withdrew its support for the latest version of the legislation.

Proposed Yield Restriction: The Fine Print

The new text is specific in its scope. It states that no covered party shall pay yield to a restricted recipient:

• Solely in connection with holding payment stablecoins, OR
• On a stablecoin balance in a manner that is "economically or functionally equivalent" to the payment of interest on a bank deposit.

However, the restriction does not apply to incentives based on "bona fide activities or bona fide transactions" that are distinct from yield generated by interest-bearing bank deposits. Loyalty programs and similar efforts would be subject to the restriction.

One individual at a crypto company noted this would require digital asset firms to restructure yield offerings from a "buy and hold" to a "buy and use" model.

Clarity and Confusion: Defining the Terms

The text includes rulemaking provisions directing the Treasury Department and the Commodity Futures Trading Commission to clarify within a year of enactment how crypto firms can offer yield.

Corey Frayer, director of investor protection at the Consumer Federation of America, noted that the wording could give regulators latitude in defining permissible yield products.

Nana Murugesan, a former senior executive at Coinbase, expressed concern that the language defining what constitutes an allowed reward "is not clear."

Ari Redford, global head of policy and government affairs at TRM Labs, explained that stablecoin rewards involve a complex mix of payments, savings-like behavior, and market incentives. This complexity has made the issue a central policy question during the bill's markup process.

Market Impact and Industry Concerns

Following the news, shares of Coinbase declined by as much as 4% . Circle Internet Group Inc. and Gemini Space Station Inc. also saw their shares fall by approximately 5%.

Crypto companies have historically utilized yield and rewards to encourage users to retain their digital assets. Notable examples include:

• Ethena's USDe, a dollar-pegged token that integrates yield into its structure.
• Coinbase's rewards for users holding Circle’s USDC stablecoin.

Crypto executives have expressed concern that this legislative delay could result in the US regulatory framework for digital assets falling behind those in other markets.

Dea Markova, director of policy at Fireblocks, stated that the delay is "concerning" as it could lead to the US being "one of the few major digital asset hubs without a clear capital markets rulebook by 2026."