Ryan Chan-Wei
In recent weeks, the Senate has received dueling letters on whether Americans should be allowed to earn rewards for holding stablecoins. The Blockchain Association urged Congress not to “reinterpret and expand” the GENIUS Act’s ban on interest payments to stablecoin holders to include the payment of rewards by third-party platforms. The American Bankers Association (ABA) pressed the opposite case. It warned that the payment of such rewards could precipitate significant deposit outflows and undermine the policy intent of the GENIUS Act.
The timing of these letters is no accident. The Senate markup on market structure legislation for digital assets is around the corner, and it represents a critical window to refine policy on stablecoin rewards before the broader legislative framework for digital assets is finalized.
At first glance, the banking industry’s position appears reasonable. As we have noted before, if a stablecoin issuer is indeed behaving in ways that resemble a bank, such as by paying something that looks like interest on customer funds, then it should not be surprised by calls for it to be regulated like one. But it is important to look deeper, because this debate is more nuanced than it appears on the surface. Apart from broader questions about what it means to be engaged in the business of banking in the first place (which are complex and beyond the scope of this post), it is crucial to avoid conflating the concepts of “issuer‑paid interest” with “independent platform‑provided rewards,” and the distinction will be explained below.
The banking industry has two main arguments for opposing the payment of rewards to stablecoin holders. First, they argue that the payment of such rewards would make holding stablecoins so attractive that it would risk “disintermediating core banking activity” by causing a significant outflow of deposits from banks. Second, they argue that the payment of rewards would contravene the policy intent of Congress in passing the GENIUS Act into law. They seem to have a great point because Section 4(a)(11) prohibits the payment of interest by stablecoin issuers to stablecoin holders. The thinking was that stablecoins should be regarded primarily as a payment instrument rather than an alternative to bank deposits. However, on closer examination, neither argument is particularly compelling.
With respect to deposit outflows, independent studies (including one from Cornell University) have shown that the fears of en masse deposit outflows are largely unfounded and far from a foregone conclusion. To the contrary, the Cornell study suggests that increased competition from stablecoins may even increase deposit growth, as banks improve their deposit rates to avoid losing too much market share.
As to the legislative intent underpinning the GENIUS Act’s prohibition on interest payments, no conflict is likely to arise as long as the rewards are paid out on an independent and discretionary basis by third‑party platforms, such as exchanges, and not by the issuers themselves. In fact, the GENIUS Act’s prohibition on issuers paying interest directly to holders under Section 4(a)(11) is not contested by the crypto industry, as they too acknowledge that it reflects a “deliberate and calibrated balance.”
As mentioned above, Congress prohibited stablecoin issuers from paying interest because the policy intent of the GENIUS Act was for stablecoins to function as payment instruments, not as substitutes for bank deposits. However, fulfilling that intent does not require a broader ban on rewards paid by third‑party platforms on an independent and entirely discretionary basis.
Nevertheless, the banking industry contends that the payment of rewards generally constitutes a “loophole” where interest payments are simply being passed through third‑party platforms to stablecoin holders. However, the reality is more nuanced. Under the GENIUS Act, it seems likely that Section 4(a)(11) would prohibit exchanges from receiving interest payments from stablecoin issuers if they hold customers’ stablecoins in custodial wallets, which is a common arrangement for centralized exchanges. This has been persuasively argued by Lee Reiners of the Duke Financial Economics Center. The upshot is straightforward: any third‑party platform utilizing custodial wallets to hold customers’ stablecoins would probably be prohibited under the GENIUS Act from receiving interest payments from stablecoin issuers. Seeing as custodial wallets are commonly utilized by third‑party platforms, the scope of the purported “loophole” narrows significantly because, in many cases, third‑party platforms would be prohibited from receiving any interest payments from stablecoin issuers in the first place.
Having established that pass-through scenarios are likely to be prohibited under the GENIUS Act, we can now turn to the context in which rewards should be clearly permitted: where rewards are issued by third‑party platforms on an independent and entirely discretionary basis. In these arrangements, the rewards do not emanate from any contractual relationship between stablecoin issuers and stablecoin holders (to receive interest payments), nor from any contractual relationship between stablecoin issuers and third‑party platforms (to pass on interest payments).
The economic incentives may resemble a pass-through in that the payment of rewards increases the attractiveness of holding stablecoins; however, the structure of the arrangement is fundamentally different. Examples of such rewards might include fee rebates for stablecoin usage, activity‑based incentives, or loyalty benefits associated with maintaining balances in certain stablecoins. Ultimately, the source of the rewards is the third-party platform, not the stablecoin issuer.
The rewards are not guaranteed, and the decision whether to pay any rewards to stablecoin holders is a matter of business judgment and rests entirely within the discretion of the third-party platform. Furthermore, stablecoin holders would not have any claim against stablecoin issuers for non‑payment of rewards; the obligation for such payment, if any, lies solely with third‑party platforms.
Finally, it is important to consider that permitting the payment of rewards on stablecoins by third-party platforms would, in fact, be consistent with the status quo in traditional finance. For example, as Summer Mersinger, a former CFTC commissioner and now head of the Blockchain Association, has argued, stablecoin rewards do not “differ meaningfully” from other rewards programs offered by financial institutions, including those offered by banks—such as “cash bonuses for using a certain credit card.” Seen in this light, rewards on stablecoins paid by third-party platforms would not be a radical departure from the norm but rather part of a long-standing competitive dynamic that has driven the evolution of the financial system.
Competition is fundamentally healthy and the lifeblood of innovation. Banks have weathered competitive pressures before—from money-market mutual funds to brokerage cash-management accounts—and they will do so again. The appropriate response here is not to stifle the growth of the stablecoin industry, but to encourage banks to embrace healthy competition rather than retreat from it.