Stablecoin Remuneration and the U.S. Regulatory Framework
In this special edition of my daily digest I’ve prepared a summary of the issues around remunerated stablecoins in the U.S. regulatory context that started with the enactment of the GENIUS Act in July 2025, which prohibited stablecoin issuers from paying interest or yield to holders but is silent on whether affiliates or third-party platforms may offer equivalent rewards — a gap the crypto industry has moved quickly to exploit. The Office of the Comptroller of the Currency (OCC) February 2026 implementing rulemaking proposes to close this administratively by extending the prohibition to affiliates and related third parties, but that rule is not yet final. The CLARITY Act, the broader digital asset market structure bill that passed the House in July 2025 but is still making its way through the Senate, has become the primary legislative vehicle for resolving the question. The most recent draft has introduced a prohibition of yield on passive holdings while permitting activity-linked rewards, but it remains to be seen if this will get it through Senate Banking Committee and on to the Senate floor for a vote.
(Scroll down past this summary for some regularly scheduled central bank digital currency (CBDC) developments.)
The Banking Industry’s Case Against Stablecoin Remuneration
The banking industry’s core argument, advanced primarily by the American Bankers Association (ABA) and the Bank Policy Institute (BPI), is that yield-bearing stablecoins would erode bank deposits and, by extension, reduce the credit available to households and businesses (Nelson, 2026). The theoretical anchor is a family of general equilibrium models which show that a digital payment instrument offering yield can displace bank deposits and contract lending if its rate exceeds a certain threshold (Chiu et al., 2023). Research, funded by Coinbase, Paradigm, PayPal, and Stripe, adapted this framework to argue that current stablecoin reward levels fall within a “safe zone” that enhances rather than damages bank intermediation by forcing deposit repricing (Cong, 2026). Nelson (2026) turned the Cong (2026) model against itself, the paper implies that once stablecoins reach projected 2030 scale, dollar-for-dollar deposit destruction and significant lending contraction follows. Wang (2025) estimates that such lending contraction could be between $65 billion and $1.26 trillion depending on adoption scale, reserve management, and whether issuers gain Federal Reserve master account access.
However, two caveats are warranted:
- The Chiu et al. (2023) framework was designed to model a central bank digital currency — a sovereign instrument set by a welfare-maximizing authority with a single rate and a financial stability mandate. Transposing it to a competitive stablecoin market, where multiple private issuers face profit incentives and no coordination mechanism, important assumptions that do not hold. The central bank in that framework can target the “sweet spot” of beneficial competition precisely because it internalizes systemic consequences; a private stablecoin issuer — or more precisely, the exchange intermediaries passing reserve income through to holders via subscription models and loyalty programs — faces no equivalent constraint.
- Wang (2025) does not model whether competitive deposit repricing could generate the crowding-in effect that Chiu et al. (2023) identify — i.e., whether banks raising deposit rates in response to stablecoin competition might expand intermediation sufficiently to offset or reverse the deposit migration. She treats the competitive response as a defensive mechanism that partially cushions outflows, not as a mechanism that could produce a welfare-enhancing equilibrium. The paper’s analytical architecture simply takes deposit outflows as directionally given and then traces their consequences for credit provision, without closing the loop through endogenous bank pricing behavior.
Nelson (2026)’s strongest argument points to the Coste (2024) analysis, which shows that even when stablecoin reserves remain within the banking system as deposits, they arrive as wholesale funding subject to 100% liquidity coverage ratio (LCR) outflow rates rather than the 5–10% applicable to retail deposits. The receiving bank must therefore hold equivalent high-quality liquid assets against them, rendering those funds prudentially inert for lending purposes. This mechanism operates regardless of whether aggregate deposit volumes change, and it is mechanical rather than behavioral — meaning it holds even if banks reprice deposits competitively in response to stablecoin competition.
The Affiliate Loophole and Section 404 of the CLARITY Act
Section 404 of the current CLARITY Act draft (“prohibiting interest and yield on payment stablecoins”) reaffirms the GENIUS Act’s core prohibition on issuer-paid yield and attempts to resolve the affiliate loophole question that it left open. It draws a distinction between rewards linked to transaction activity (e.g., paying a stablecoin to a merchant, completing a cross-border transfer) and rewards accruing solely from holding a balance in a digital wallet. The former would be permitted; the latter prohibited. In practice, this mirrors the legal recharacterization already underway in the market, such as Coinbase’s move to restrict USDC rewards to Coinbase One subscribers and its framing of those rewards as a “loyalty program” rather than passive yield. This is the kind of arrangement the most recent draft attempts to legitimize for activity-linked payments while drawing a line against pure balance-based accrual. Whether that line is administratively enforceable, given that the economic substance of near-term Treasury yield pass-through does not change based on how the payment is labelled, remains the central unresolved question.
The Challenge of Fintech Cash Management Products
An analytical tension in the banking industry’s position is revealed by its treatment of fintech cash management products. Platforms such as Betterment currently pay depositors approximately 3.25% annually — close to the federal funds rate — by sweeping customer funds across a network of Federal Deposit Insurance Corporation (FDIC)-insured banks. This model does to branch-based banks’ deposit spreads essentially what the Chiu et al. (2023) mechanism predicts a competitive outside option should do: it forces repricing. Yet when the FDIC proposed in 2024 to tighten the brokered deposit rules that govern these arrangements, which would have subjected fintech sweep products to additional restrictions, the ABA, BPI, and a coalition of nine other trade groups jointly opposed the proposal.
The explanation likely lies in the structure of the banking lobby’s membership. Large banks that anchor sweep networks and receive wholesale deposits via them have no interest in restricting arrangements that benefit their funding base. The stablecoin case is structurally different — reserves held in Treasury bills or at the Federal Reserve bypass the banking system entirely — which is why it generates a unified banking industry response. The banking lobby’s argument implicitly treats the current level of deposit spreads as socially optimal and worth protecting, while simultaneously defending the very competitive mechanisms that have already eroded those spreads for rate-sensitive depositors.
Unresolved Tensions
Several questions remain open regardless of how the drafting process resolves. The activity-versus-passive-holding distinction in Section 404 rests on a legal characterization that may not be administratively stable. If the economic pass-through of reserve income to holders is empirically indistinguishable between the two forms — Krause (2026) found a 98.7% correlation between USDC rewards and Treasury yields — enforcement of the distinction will depend on definitional precision that neither the current legislative text nor the OCC rulemaking has yet provided. The Coste (2024) LCR mechanics apply irrespective of how the yield question is resolved, suggesting that prudential concerns about deposit composition persist even under a complete yield prohibition. The Wang (2025) finding that effects are highly heterogeneous across bank types — with mid-sized regional banks facing the greatest vulnerability — points to a distributional dimension that aggregate models obscure and that community banking advocates have raised without yet quantifying rigorously at the institutional level. Finally, the broader question of whether branch-based deposit spreads reflect productive intermediation or market power against inertial depositors remains analytically unresolved in the policy debate (Zhang et al., 2024). The answer to that question matters considerably for evaluating how much of the banking industry’s concern reflects genuine systemic risk versus incumbent rent protection.
Now on to the regularly scheduled updates…
Digital Shekel Project: Progress Report 2025 (Bank of Israel)
The Bank of Israel published an update on its digital shekel project that is progressing toward an end‑2026 issuance decision, concluding that expected macroeconomic benefits are likely to exceed the associated costs. The analysis found that disintermediation risk is low under appropriately calibrated holding limits, with policy rate cuts and liquidity injections (via short‑term Bank of Israel bill redemptions) sufficient to offset deposit outflows except under extreme scenarios. A decentralized supervisory model is proposed, with existing financial regulators overseeing their respective digital shekel participants under a uniform Bank of Israel rulebook. A unified multipurpose infrastructure for retail and wholesale use is found technologically feasible and preferable to separate systems. Open questions include whether the digital shekel should be remunerated, offline payment double‑spend prevention, and retail‑versus‑wholesale sequencing. In addition, a quantitative survey of small businesses found that only one‑fifth expressed interest in using digital shekels, citing satisfaction with existing digital payment methods, although they indicated general interest in a digital shekel if it were to offer lower fees than current digital payment methods. A qualitative survey of large corporations also found lukewarm interest in using a digital shekel, with respondents mainly viewing it as potentially relevant for internal settlement and treasury operations rather than for customer‑facing retail payments, and stressing the importance of compatibility with existing systems. [Bank of Israel]
BOE DLT Innovation Challenge 2025: Final Report (BOE)
The Bank of England (BOE) reported on explorations, carried out in September–October 2025 with nine firms, to see if wholesale central bank money can be transacted and settled on an external programmable ledger not controlled by the central bank. It concluded that distributed ledger technology (DLT) can technically speed wholesale settlement and improve throughput but only by accepting material trade‑offs in finality, governance, and resilience. Designs that deliver faster, more “deterministic” settlement tend to shift risk and trust assumptions, weakening decentralization or operational robustness relative to established real‑time gross settlement systems. Scalability enhancements add architectural complexity and create new dependencies that interact negatively with control and resilience requirements. Interoperability solutions with other DLT and legacy systems rarely eliminate trust or operational dependencies; instead they reallocate them across networks or third parties, including off‑chain components for permissionless ledgers. Overall, the trials suggest no dominant DLT architecture for wholesale settlement and frame the policy problem as one of choosing which trade‑offs in speed, control, and governance are acceptable. Further targeted DLT experiments are planned for 2026. [BOE]
