South Dakota Bankers Association Pushes for Clarity on Stablecoin Interest Loophole

The GENIUS Act established rules for payment stablecoins and prohibited issuers from paying interest or yield to holders, but a loophole has been exploited.

Cryptocurrency exchanges and digital asset platforms have been offering rewards or yield-like incentives to customers who hold payment stablecoins, getting around the prohibition by having those rewards come from an exchange, affiliate, or other third party rather than directly from the stablecoin issuer.

The South Dakota Bankers Association has been working with lawmakers to close this loophole and ensure that products designed as payment instruments don't become de facto interest-bearing alternatives to bank deposits.

Banks operate under safety, soundness, and consumer protection requirements, and a stable deposit base is crucial for providing credit. If dollars move from insured bank deposits into uninsured stablecoin products offering attractive rewards, those dollars are no longer available to support lending activity, leading to less funding, higher borrowing costs, and fewer resources available for economic activity in communities.

The CLARITY Act aims to strengthen the GENIUS Act's prohibition on interest and yield by making technical refinements to the language. Banking organizations have urged lawmakers to ensure that the legislation provides clarity and prohibits crypto platforms from providing interest or economically similar rewards on stablecoins, so the prohibition is clear, comprehensive, and difficult to work around.