Banks Win Key Battle as Crypto Bill Bars Stablecoin Interest Payments

Banks secured a win in the fight over stablecoin yield as Senate lawmakers released updated crypto market structure legislation draft Tuesday morning, which prohibits digital asset service providers from paying "any form of interest or yield" solely for holding payment stablecoins.

The provision, contained in Section 404 titled "Preserving Rewards for Stablecoin Holders," says that a "digital asset service provider may not pay any form of interest or yield (whether in cash, tokens, or other consideration) solely in connection with the holding of a payment stablecoin."

The language directly addresses months of intensive lobbying from community banks that warned stablecoin yield could drain deposits from the traditional banking system.

Kadan Stadelmann, Chief Technology Officer at Komodo Platform, told Decrypt the draft language favors traditional banks.

“Stablecoins were originally seen as an alternative to traditional banking, but this draft proposal curbs the passive yield feature, stripping them of their competitive edge," he added.

Last week, the American Bankers Association's Community Bankers Council sent a letter to lawmakers warning that, without stronger legislative clarity, up to $6.6 trillion in deposits could be at risk, citing concerns that crypto companies were circumventing the GENIUS Act's intent by funneling rewards through affiliated exchanges.

Activity-based rewards remain

However, the updated draft preserves broad carve-outs for activity-based compensation.

The prohibition "shall not apply with respect to an activity-based reward or incentive," including rewards tied to "a transaction, a payment, a transfer, a conversion, a remittance, or settlement activity," as well as loyalty programs, providing liquidity or collateral, and "governance, validation, staking, or other ecosystem participation."

The bill also requires the SEC and CFTC to jointly establish disclosure rules within 360 days, mandating that any compensation offered by digital asset intermediaries be presented in "plain English" with clear identification of who is paying the rewards and explicit statements that a payment stablecoin "is neither an investment product nor a deposit" and "is not insured by the Federal Deposit Insurance Corporation or any other governmental entity."

Senators Jack Reed (D-RI), Chris Van Hollen (D-MD), and Tina Smith (D-MN) sent a letter to Banking Committee Chair Tim Scott (R-SC) demanding a public hearing before Thursday's scheduled markup.

"It is now 6 p.m. on Monday, and neither the full Committee nor the public has seen anything resembling the text that will be marked up on Thursday at 10 a.m.," the senators wrote, warning that members would have less than 48 hours to review the legislation and less than 24 hours to prepare amendments.

“Given how little time there is between these latest proposals and the planned hearing on Thursday, I'm not holding my breath for the bill to pass this month,” Nic Puckrin, digital asset analyst and co-founder of the Coin Bureau, told Decrypt.

He anticipated further delays “as committee members grapple with the implications of the proposed amendments,” adding that, "any delays will weigh heavily on a digital asset market that has struggled with momentum for months."

The battle over stablecoin yield

The stablecoin yield fight traces back to the passage of the GENIUS Act last summer, which prohibited stablecoin issuers from paying interest but left questions about whether affiliated platforms could offer rewards.

Banking groups warned in August that "the restriction is easily bypassed because exchanges or other third parties can still offer rewards to stablecoin holders."

Last week, rival stakeholders, including representatives from SIFMA and crypto industry groups, met privately to hash out disagreements over DeFi regulatory carve-outs and stablecoin yield provisions, sources told Decrypt.

The sources described the talks as "constructive" but noted SIFMA's push to retroactively ban yield-generating stablecoins.