Washington Is Redefining What Stablecoins Are For

They are not deposits. They are not investment products. They are not federally insured. And under the proposed Digital Asset Market Clarity Act, crypto companies generally could not pay U.S. customers interest simply for holding them.

That sounds like a straightforward ban on stablecoin yield. It is not.

The legislation instead attempts something more economically consequential: drawing a legal boundary between compensation for possessing digital money and compensation for putting that money to work.

Passive yield would be prohibited. Payments incentives, liquidity rewards, staking benefits and other activity-based compensation could remain permissible.

The result would not be a yield-free stablecoin market. It would be a market in which yield must increasingly be attached to a transaction, service or identifiable form of risk.

That distinction could reshape competition among banks, crypto exchanges, wallets, payment companies and tokenized investment products. It would also give regulators the difficult job of deciding when a reward is genuinely earned and when it is simply deposit interest wearing a crypto label.

Congress Draws a Line Around Digital Cash

One section of the proposal targets “covered parties,” defined broadly to include digital asset service providers and their affiliates, while excluding permitted stablecoin issuers and certain registered foreign issuers. Its restrictions apply to compensation paid to U.S. customers or users of those service providers.

The central prohibition is direct. A covered company could not pay interest or yield, whether in cash, tokens or another form, solely because a customer holds a payment stablecoin. Nor could it pay compensation on a stablecoin balance in a way that is economically or functionally equivalent to interest on a bank deposit.

That language is aimed less at the stablecoin itself than at the account wrapped around it.

Many dollar-backed stablecoins are supported by reserves that may include Treasury securities and other cash-equivalent assets. The economic question has always been who gets the return on those reserves. The issuer may retain it. A platform may share some of it with customers. Or a separate investment product may pass through market yield.

The proposed law would close off one version of that model, a crypto exchange or wallet presenting an idle stablecoin balance as the functional equivalent of an interest-bearing savings account.

The bill says payments based on stablecoin balances could inhibit the “key functions” of depository institutions, while also recognizing stablecoins as infrastructure capable of strengthening the U.S. payments system and the dollar’s global position.

In other words, lawmakers want stablecoins to compete with payment rails, but not necessarily with bank deposits.

The Ban Has a Large Door Built Into It

The proposal’s more revealing provisions concern what companies would still be allowed to do.

Rewards based on legitimate activity or transactions would remain permissible, so long as they are not functionally equivalent to deposit interest. The bill specifically contemplates incentives connected to payments, transfers, conversions, remittances and settlement. It also names rebates offered for accepting or using a payment stablecoin.

That creates room for stablecoin versions of familiar card economics, including merchant incentives, payment rebates, cross-border discounts, subscription benefits and loyalty rewards.

The legislation goes further. Compensation could also be permitted when customers provide market-making liquidity, post collateral for trading or otherwise place assets at credit or investment risk. Participation in governance, validation, staking, and other products or services could also qualify.

That is a significant distinction. It means a customer may be compensated for assuming risk, supplying liquidity or performing an economically useful function. What the customer generally could not do is collect a return merely because a stablecoin remains in an account.

Even balance-based formulas are not automatically prohibited. The bill says permissible compensation may be calculated by reference to a customer’s balance, holding duration or tenure.

That nuance will matter.

A reward can rise with the size and duration of a balance without necessarily being classified as passive interest if it is tied to a qualifying transaction, service or activity. The commercial battle will therefore move from whether platforms can advertise an annual percentage yield to how convincingly they can connect compensation to customer behavior.

Yield Becomes a Product-Design Problem

For crypto platforms, the legislation would turn yield from a marketing feature into a product architecture question.

A simple offer, such as hold $10,000 in stablecoins and earn 4%, would sit squarely in the danger zone. A program rewarding a customer for using stablecoins to make payments, provide liquidity or post collateral could survive, depending on its structure and forthcoming regulations.

That is likely to encourage platforms to unbundle products that appear seamless to consumers.

One balance might function as payment money and pay no passive return. Another could be swept into a lending arrangement, tokenized money-market fund or other investment vehicle with separate risk disclosures. A third could earn incentives through transactional usage.

The economic return may not disappear. It may migrate into products that more clearly reveal what generates it.

That could benefit tokenized Treasury funds and other on-chain investment products. Stablecoins would serve as the settlement layer, while yield-bearing instruments would serve as the investment layer. The cleaner that separation becomes, the harder it will be to describe every dollar-denominated blockchain asset simply as digital cash.

It could also accelerate the convergence of crypto platforms with conventional brokerage models. Customers seeking liquidity and payments would hold stablecoins. Customers seeking returns would have to make an affirmative investment decision.

The Real Fight Will Be Over Equivalence

The bill relies on whether compensation is “economically or functionally equivalent” to interest on a bank deposit. That phrase gives the proposal flexibility, but it also introduces uncertainty.

A loyalty program paying a fixed annual reward on all balances may look like interest even if the company calls it a promotion. A payment incentive that requires only one nominal transaction before unlocking a year of balance-based rewards could face the same problem. The proposal expressly prohibits circumvention and authorizes regulators to issue rules against evasive structures.

The Securities and Exchange Commission, Commodity Futures Trading Commission and Treasury Department would have one year after enactment to jointly clarify the boundary and publish a nonexclusive list of permissible programs. Companies that structure programs in good-faith reliance on the statutory exceptions would receive a limited opportunity to correct them if regulators later disagree.

That rulemaking could become as important as the legislation itself.

Regulators would need to distinguish genuine economic activity from manufactured activity designed to preserve a savings-like return. The more generous they are, the more platforms can replicate deposit economics through rewards programs. The stricter they are, the more yield will be pushed into separately regulated investment and credit products.

Marketing Gets Regulated Alongside Economics

The proposal does not stop at how compensation is generated. It also dictates how stablecoins and rewards may be described.

Covered companies could not market payment stablecoins as deposits, investment products, government-guaranteed assets or federally insured funds. They also could not describe related compensation as risk-free or comparable to deposit interest.

Future rules would require prominent, plain-English disclosures identifying who provides the compensation, the conditions under which it is paid and all material terms. The disclosures would also need to state that payment stablecoins are not deposits, investments or government-insured products.

That is an effort to prevent platforms from preserving the psychological appeal of a savings account after losing the legal ability to offer one.

The stakes are substantial. Knowing and willful violations could carry Treasury Department civil penalties of as much as $5 million for each violation.

Stablecoins Are Being Assigned a Job

The bill’s yield provisions ultimately reveal Congress’ preferred role for payment stablecoins.

They are supposed to move money, settle transactions, support programmable financial services and extend dollar-based infrastructure. They are not supposed to become lightly regulated, uninsured savings accounts operated by technology companies.

That is a compromise banks may welcome, but it is not a complete victory for the banking sector. Stablecoins could still compete in payments, merchant acceptance, remittances and treasury operations. Platforms could still use rewards to drive adoption. And customers could still earn returns when they take investment or credit risk.

The proposal would simply require the market to stop pretending those activities are the same.

Under the Clarity Act, the dividing line is not between stablecoins that pay and stablecoins that do not. It is between money that sits and money that acts.

The legislation’s most durable contribution could be not eliminating stablecoin yield, but forcing the industry to explain where it comes from.