Congressional attempts to ban cryptocurrency platforms from providing yield, or interest, on stablecoin holdings have so far failed, and will likely continue to fail, as long as they run up against economic logic, writes David Krause.
On January 14, Coinbase Chief Executive Officer Brian Armstrong announced on X that his cryptocurrency exchange “unfortunately can’t support” the United States Senate’s proposed Digital Asset Market Clarity Act. The draft’s language would prohibit crypto platforms from offering yield—essentially interest—on stablecoins, which are cryptocurrencies like U.S. Dollar Coin (USDC) whose values are pegged to another asset like the U.S. dollar. At face value, the Clarity Act is supposed to help regulators maintain the legal distinction between cash and securities to protect investors. It received support from traditional banks, which oppose crypto platforms providing yield on stablecoin deposits because they create unregulated competition for traditional banks’ core deposit-taking role. This directly threatens their funding base, lending capacity, and financial stability.
Within hours of Armstrong’s message, the Senate Banking Committee canceled its scheduled markup, a development reported by The New York Times as evidence of Coinbase’s growing influence in Washington. This decision highlights the cryptocurrency industry’s growing sway, a power amplified by the Trump administration’s appointment of crypto-friendly regulators that critics point to as evidence of regulatory capture.
The episode is best understood not as a sudden display of political muscle or a competition between old and new financial firms to capture regulators, but as a revelation of unavoidable economic logic: crypto platforms like Circle that issue stablecoins (Circle issues USCD) invest the cash and other assets they hold in reserve, often in U.S. Treasuries, to support the stablecoin pegs to the dollar, generating revenue. By passing a portion of this investment yield back to stablecoin holders, they transform a static digital dollar into a dynamic, income-earning asset. The same logic applies to Crypto exchanges like Coinbase, which offer users accounts to hold and trade cryptocurrencies but do not issue the coins themselves.
Yield programs are not ancillary to modern stablecoin platforms; they are central to their competitive positioning by encouraging deposits which might otherwise go to savings and money market accounts with traditional banks that can offer yields of their own. Attempts to prohibit stablecoin yields without addressing that reality do not induce compliance. They induce regulatory arbitrage.
That dynamic has already played out under the Guiding and Establishing National Innovation for U.S. Stablecoins Act (“GENIUS Act”), enacted in July 2025, which prohibits permitted stablecoin issuers from paying “interest or yield” to holders. While the GENIUS Act restricted the primary issuers themselves, the subsequent Clarity Act was introduced to close the “distributor loophole” by extending this prohibition to third-party exchanges and affiliates like Coinbase. As of now, issuers like Circle can essentially—if not technically—still pay interest or yield to holders by distributing “rewards” to exchanges like Coinbase, which does not hold the asset itself but can pass on these rewards to holders which keep the assets in Coinbase accounts. Circle still receives yield on the reserve cash of USDC holders which it passes on to holders minus a platform fee. Coinbase also receives a small cut as the intermediary. It’s a legal gray area.
Indeed, seven months after enactment of the GENIUS Act, Coinbase continues to advertise U.S. dollar coin (USDC) “rewards” that closely track Treasury yields. By framing these payouts as “loyalty rewards” rather than “interest,” the platform attempts to offer users a competitive return on their holdings while navigating the unsettled regulatory boundary between a payment tool and a regulated security. The law changed. The economics has not.
When properly implemented, the rules promulgated in the GENIUS and Clarity Act seek to preserve the line between transactional tools like cash and financial assets like securities that trigger consumer protection and disclosure requirements of federal securities law. It is the erasure of this legal gray area that Coinbase seeks to avoid.
The Data shows how the GENIUS Act failed
Using archival snapshots from the Internet Archive’s Wayback Machine, I reconstructed Coinbase’s advertised USDC reward rates from January 2024 through January 2026 and compared them to contemporaneous three-month Treasury Bill yields published by the Federal Reserve Bank of St. Louis through FRED (3-Month Treasury Bill Secondary Market Rate, Series TB3MS).
Across the full sample, USDC rewards exhibit a 98.7 percent correlation with Treasury yields. Prior to the GENIUS Act’s enactment, the correlation was 99.3 percent. After enactment, rewards declined modestly but remained extremely high at an 84.6 percent correlation with Treasury yields. Ordinary least squares regression analysis shows that approximately 95.6 percent of changes in Treasury yields pass through to users as USDC rewards, with no statistically significant structural break following July 2025.
Just as important is what did not change. Coinbase retained a stable intermediation spread of roughly 20–25 basis points across both regulatory regimes. Practically speaking, this means that for every $1,000 in interest earned by the underlying reserves, Coinbase keeps approximately $2.50 as a service fee before distributing the remaining funds to its users. That spread reflects platform compensation for custody, compliance, and distribution rather than transitory market inefficiency.
Additional empirical features, detailed in my companion SSRN paper, reinforce the conclusion that these rewards are economically indistinguishable from interest:
-Reward adjustments lag Treasury movements by approximately one week, consistent with operational pricing practices rather than promotional discretion.
-Rewards rise and fall symmetrically with Treasury yields, including during the Federal Reserve’s 2024–2025 easing cycle (see summary of Federal Open Market Committee decisions).
-As interest rates declined, platform spreads compressed rather than rewards disappearing, indicating competition for balances rather than regulatory restraint.
The known legal gap
This outcome was anticipated. As Lee Reiners of Duke University observed shortly after enactment, the GENIUS Act prohibits issuers from paying interest to “holders” but does not define who qualifies as a holder in intermediated custodial arrangements.
Circle is barred from paying yield directly to retail users and holders of USDC. Nothing in the statute, however, prevents Circle from paying distribution or marketing fees to an exchange, which then passes value through to users as “rewards.” The economic substance of the transaction remains unchanged: income derived from Treasury securities which Circle holds to back USDC flows to end users, net of a platform fee.
This ambiguity reflects a familiar legislative compromise. Banking interests sought to prevent stablecoins from competing with insured deposits, while crypto platforms insisted that yield programs were commercially indispensable to attract users. The resulting statute prohibited issuer-level interest while remaining silent on intermediated distribution. Each side secured a partial win. Neither secured a durable solution.
Regulatory arbitrage as an institutional outcome
The persistence of USDC rewards under a statutory ban is best understood as regulatory arbitrage in its classic sense: exploiting differences in legal treatment to achieve economically equivalent outcomes.
What makes this episode notable is how little innovation was required. No complex financial engineering was necessary. Yield continued simply by routing payments through an exchange rather than directly from issuer to user.
This highlights the limits of prohibition in platform-based financial markets. When a business model depends on a particular economic function, firms will either restructure around prohibitions or mobilize politically to block them. The GENIUS Act illustrates the former strategy. Coinbase’s January intervention against the Clarity Act illustrates the latter.
Securities law implications
The GENIUS Act’s interest prohibition was widely understood as an attempt to prevent payment stablecoins from satisfying the “expectation of profits” prong of SEC v. W.J. Howey Co. (1946). By explicitly banning the payment of interest, the Act ensures that stablecoins are legally classified as non-security payment tools rather than investment contracts, as the primary motivation for holding them remains their utility as a medium of exchange rather than a desire for financial gain.
When rewards track Treasury yields with near-mechanical precision, users can reasonably expect profits derived from the efforts of others, namely, the issuer’s reserve management and the platform’s intermediation. This framework suggests that when an issuer like Circle manages reserves and a platform like Coinbase distributes the yield, the product functions as a security that requires federal registration to protect everyday investors from undisclosed financial risks. That predictability strengthens, rather than weakens, the Howey analysis.
The same concerns arise under Reves v. Ernst & Young(1990). Courts have consistently emphasized that securities law focuses on the economic reality of a deal rather than the labels used to describe it. As the Supreme Court explained in Howey, the law is designed to cover any creative scheme where someone uses other people’s money by promising them a profit. This means that even if a platform calls a payout a “reward” or an “incentive,” courts will still treat it as a regulated security if it functions like an investment in practice. Applying the family-resemblance test, yield-bearing stablecoins increasingly resemble short-term notes or cash-equivalent instruments marketed for return rather than for payment functionality. Marketing language emphasizing “earning” reinforces that perception, while the GENIUS Act’s porous structure undermines claims of a comprehensive alternative regulatory regime.
Competition, not innovation
Industry advocates often frame stablecoin rewards as financial innovation. The data supports a more conventional explanation: competition for balances.
USDC rewards closely resemble what a fully collateralized money-market-like instrument would deliver, minus a modest platform fee. While this efficiency appears to be a win for retail consumers similar to how competitive pressures from trading and investing company Robinhood reduced trading fees to zero, it introduces a “regulatory gap” where users lack the federal insurance and rigorous oversight that typically safeguard traditional money market funds. This creates a trade-off where the immediate benefit of higher yields is balanced against a higher risk of platform insolvency or asset de-pegging without a government backstop. The innovation lies in distribution and branding, not in return generation. Stablecoins compete directly with bank deposits, brokerage sweep accounts, and Treasury funds for the same marginal dollar.
From this perspective, banking opposition to stablecoin interest is unsurprising. Deposit funding remains central to the traditional banking model, and competition from nonbank instruments threatens margins. This tension underscores a fundamental policy trade-off: while a “Coinbase victory” might lower costs and increase choices for consumers through higher yields, the government remains wary that allowing stablecoins to act as high-interest shadow banks could drain trillions from traditional deposits, potentially weakening the banking system’s ability to fund mortgages and business loans. The GENIUS Act reflects that concern, but only partially, because banks lack direct leverage over crypto platforms’ intermediated structures.
Why prohibition failed and will continue to fail
The GENIUS Act illustrates a broader lesson. In financial systems, prohibiting a function at a single node rarely eliminates the function itself. It reallocates it. In the case that the Clarity Act is signed into law, exchanges may simply recharacterize yield as governance token distributions or protocol fees, routing rewards through offshore affiliates. Or they may steer users toward non-U.S. issuers outside the Act’s reach.
More importantly, prohibition ignores political constraints. As the Clarity Act episode demonstrates, platforms with concentrated incentives and the credible threat of relocating offshore can stall legislation altogether. Policymakers face a choice not between prohibition and permissiveness, but between symbolic bans and functional regulation.
Conclusion
The GENIUS Act’s interest prohibition did not eliminate yield. It rerouted it. USDC rewards continue to track Treasury yields with extraordinary precision, flowing through intermediary structures that preserve economic substance while satisfying formal compliance.
This outcome is not anomalous. It is the predictable result of regulating a competitive financial function through a narrow statutory ban shaped by interest-group compromise. Where incentives are strong and structures are flexible, labels will not bind. Even if the Clarity Act is enacted as the traditional banks hope, the economics of cryptocurrency platforms and stablecoins will seek out new ways to provide yield on users’ holdings.
On February 25, the Office of the Comptroller of the Currency proposed rulemaking to implement the GENIUS Act. It includes a proposed rebuttable presumption targeting affiliate-based yield arrangements in an effort to close the intermediary gap between stablecoin issuers and cryptocurrency exchanges. It is also a step toward functional regulation over formal labeling. Whether it succeeds will depend on the outcome of the comment process, the final rule’s coordination with ongoing Clarity Act negotiations, and the willingness of courts to look through structure to economic substance—the same inquiry that animates securities law analysis.
For full regression results, robustness checks, and methodological detail, see David Krause, The GENIUS Act’s “Interest” Prohibition: Evidence of Regulatory Arbitrage in Digital Asset Markets (SSRN, Jan. 15, 2026).
Author Disclosure: The author reports no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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