Cryptocurrency companies can continue to pay interest-like rewards to customers, federal regulators said Wednesday, despite warnings from banks that such programs could drain trillions of dollars in deposits from the banking system.
The new rules are part of the implementation of the GENIUS Act, which was signed into law last year and was meant to codify the rules and regulations around issuers of stablecoins.
Under the rules published by the Office of the Comptroller of the Currency, stablecoin issuers like Circle will continue to be prohibited from paying interest to people holding their coins. But the exchanges that trade and hold those stablecoins, like Coinbase, Robinhood, and others, can pass along any earnings from those coins to customers in interest-like rewards.
Stablecoins are a type of cryptocurrency designed to maintain a steady value, typically $1 per coin. Stablecoins are backed by bank deposits and U.S. Treasuries, which earn interest.
The interest earned from the securities backing stablecoins is at the center of the fight between banks and crypto companies. The cryptocurrency industry wants to offer customers a return on holding stablecoins by converting the interest that stablecoin issuers earn from bonds and dollars backing those coins into a yield for customers.
Under the new OCC rules, exchanges will be able to do so on a “case-by-case basis,” regulators said. The practice was not prohibited, as banks had wanted.
Banking groups have pushed for tighter restrictions on stablecoin rewards largely because cryptocurrency companies can and often do offer higher yields on savings than traditional bank accounts. For example, Coinbase offers customers yields of up to 3.5% on USDC balances, whereas the average traditional savings account offers a yield of 0.38%, according to the latest figures from the Federal Deposit Insurance Corp.
If stablecoins and exchanges can outcompete banks on yield, traditional bank customers could move their savings out of banks and into crypto, a phenomenon known as deposit flight. The banking industry has said this would result in banks having a decreased capacity to lend, and in a hypothetical worst-case scenario, cause some banks to close or fail. When lawmakers drafted the CLARITY Act, one source of intense debate was how stablecoins would impact the traditional banking sector.
The American Bankers Association, the umbrella industry lobby group for the industry, said in a statement that the OCC’s decision will threaten “the funds banks use to make the loans that drive the U.S. economy.”
The rule “will preserve the status quo for crypto platforms despite Congress’s clear intent to protect local lending,” the ABA said.
Banks and consumer advocacy groups, typically opponents in the fight over how to regulate the nation’s financial system, have been allies on this particular issue. Consumer groups have been concerned that consumers will view these interest-like reward systems as similar to what banks offer in a bank account. But the cryptocurrency world has no equivalent of deposit insurance, such as that offered by the Federal Deposit Insurance Corporation, in the .
“(The OCC) has implemented a rule that provides a free pass to stablecoin issuers to do the activities of banks without any of the protections that keep our banking system safe,” said Phillip Basil, director of economic growth and financial stability at Better Markets, in a statement.
—Ken Sweet, The Associated Press
