Recent congressional debate over the proposed CLARITY Act has highlighted a pivotal issue in stablecoin regulation: whether stablecoin issuers, or the exchanges and other third parties that distribute their tokens, should be permitted to offer yield to stablecoin holders. On January 12, the Senate Banking Committee released an updated draft of the CLARITY Act including Section 404, a provision prohibiting digital asset service providers from paying any form of interest or yield “solely in connection with the holding of a payment stablecoin.” While the legislation seeks to establish clearer federal rules for digital asset markets, the treatment of stablecoin yield has emerged as a central point of contention.
Section 404 is designed to address a gap left by the GENIUS Act, which established a federal framework for the issuance of payment stablecoins (previously discussed here, here and here). While the GENIUS Act prohibits stablecoin issuers from paying interest or yield directly to stablecoin holders, it does not expressly bar exchanges, custodians, or other affiliated third parties from offering yield funded indirectly by the issuer. Section 404 would close this gap by extending the ban to digital asset service providers and their affiliates, which would prohibit stablecoin products from offering yield indirectly and ensure the ban applies regardless of how the product is structured.
The banking industry has advocated for closing the GENIUS Act’s “affiliate loophole.” In a January 5 letter to Senators, the American Bankers Association’s Community Bankers Council argued that allowing stablecoin-related entities to offer yield would siphon deposits away from community banks, undermining their ability to provide relationship-based lending to small businesses, farmers, and households. The letter includes a state-by-state analysis showing potential outflows of community bank deposits totaling $6.6 trillion.
The Blockchain Association, a trade group representing the digital asset industry, has released its own letter to Congress opposing efforts to broaden the GENIUS Act’s ban on stablecoin yield. The letter argues that Congress deliberately preserved third-party rewards in the GENIUS Act as part of a negotiated compromise, and that expanding the yield ban would depart from that legislative intent. The letter further contends that banks assume significantly greater balance-sheet risk through deposit-taking and lending than GENIUS-regulated stablecoin issuers, which are required to maintain one-to-one reserve backing. The letter also emphasizes that limiting rewards would impose real costs on consumers at a time when bank deposit yields remain low despite a higher-rate environment.
The Senate debate over Section 404 of the CLARITY Act remains unresolved, and the bill has slowed in committee while the banking industry and the crypto industry continue to press their respective sides of this issue. The Senate Banking Committee has postponed its planned markup of the bill, with no new date yet set.
Putting It Into Practice: Ultimately, the fight over Section 404 will reveal where Congress draws the line between payments innovation and bank-like activity. How lawmakers resolve this tension will signal whether the U.S. intends to regulate stablecoins solely as payment instruments or as a more flexible financial tool with the potential to disrupt existing payment and banking models. Stablecoin issuers, banks, and fintechs should closely monitor how Congress ultimately resolves the yield question.