Key Takeaways
- The Treasury is consulting on how to implement the GENIUS Act.
- Coinbase argued that stablecoin yields should be considered loyalty rewards, not interest payments.
- On the other hand, Wall Street is pushing for an expansive ban on stablecoin yield.
A prohibition on interest-bearing stablecoins is one of the defining features of the U.S. GENIUS Act.
However, the Treasury hasn’t yet determined how it will interpret the rule.
Pushing for an interpretation that will accommodate its “Earn” program, Coinbase has argued that the yields it provides to depositors are more akin to “rewards or loyalty programs” than interest payments.
Stablecoin Interest in the GENIUS Act
At first glance, the GENIUS Act’s prohibition on stablecoin interest seems to be unambiguous.
As the legislation states at § 4(a)(11):
“No permitted payment stablecoin issuer or foreign payment stablecoin issuer shall pay the holder of any payment stablecoin any form of interest or yield (whether in cash, tokens, or other consideration) solely in connection with the holding, use, or retention of such payment stablecoin.”
However, platforms including Coinbase and PayPal are banking on a loophole to let them continue offering yield on stablecoin deposits.
Because the platforms that grant retail customers access to stablecoins aren’t themselves issuers, they argue that the prohibition doesn’t apply.
However, the distinction between issuers and third parties can be murky.
Although technically USDC is issued by Circle and PYUSD is issued by Paxos, Coinbase and PayPal receive a share of the profits generated from stablecoin reserves through revenue-sharing agreements.
However, Wall Street is lobbying to close the loophole.
Treasury Consultation Pits Banks Against Crypto Firms
Ultimately, it is up to the government to determine who can or cannot make payments to stablecoin depositors.
Coinbase’s letter responds to an advanced notice from the Treasury regarding the implementation of the GENIUS Act.
“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,” Coinbase argued in a letter to the Treasury on Nov. 4.
Any such “misreading” of the GENIUS Act would “hurt consumers by stripping market‑based incentives that lower payment costs, spur merchant acceptance, and help new users adopt safer, regulated U.S. stablecoins,” the letter argued.
In their response to the Treasury, the Consumer Bankers Association, the American Bankers Association, the Bank Policy Institute, the Financial Services Forum, and The Clearing House Association collectively spoke for America’s banks.
In Wall Street’s view, Congress intended for the prohibition on stablecoin interest to have a “broad scope.”
“The payments of interest or yield that the GENIUS Act prohibits should be viewed as effectively including any economic benefit that may be provided by an issuer, directly or indirectly (such as through an affiliate or partner),” the letter stated.
Permitting stablecoin interest “would make these digital assets effectively investment products.”
In turn, any “shift in perception” that caused consumers to view stablecoins as equivalent to a bank account could lead to a “deposit flight,” threatening banks’ ability to create credit, industry representatives warned.
Stablecoin Tax Questions
Banks’ view that stablecoins should only be used for payments and not treated as an investment also relates to their status under the federal tax regime.
Beyond the question of interest payments, Coinbase also expressed concerns about how stablecoins are taxed.
The letter argued that stablecoins should be treated as a pure payment instrument for tax purposes, not a form of debt or investment.
“Classifying payment stablecoins as debt for tax purposes would create unwarranted complexity […] Instead, payment stablecoins should be treated as cash equivalents,” it stated.
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James Morales is CCN’s blockchain and crypto policy reporter. He has been working in the news media since 2020, writing about topics such as payments, banking and financial technology. These days, he likes to explore the latest blockchain innovations and the evolving landscape of global crypto regulation.
With an educational background in social anthropology and media studies, James uses his platform as a journalist to explore how new technologies work, why they matter and how they might shape our future.
