Regulators Allow Crypto Firms to Continue Offering Interest-Like Rewards

Federal bank regulators announced Wednesday that cryptocurrency companies may continue to offer interest-like rewards to customers, a decision that comes despite concerns from banks that such programs could divert substantial deposits from the traditional banking system.

The new guidelines are part of the implementation of the GENIUS Act, a law enacted last year intended to establish clear rules and regulations for stablecoin issuers. Under these rules, while stablecoin issuers themselves are prohibited from paying interest on stablecoins, the exchanges that trade and hold these assets, such as Coinbase and Robinhood, are permitted to pass on earnings derived from these stablecoins to their customers.

Stablecoins are a category of cryptocurrency designed to maintain a stable value, typically pegged at $1 per coin. They are usually backed by reserves of bank deposits and U.S. Treasury securities, which themselves generate interest.

The interest earned from these underlying securities is a focal point of the ongoing dispute between banks and cryptocurrency firms. The crypto industry aims to provide customers with returns on their stablecoin holdings by channeling the interest earned by stablecoin issuers on their reserves into yields for customers.

According to the Office of the Comptroller of the Currency (OCC), exchanges will be able to offer these rewards on a case-by-case basis. The OCC's decision means the practice is not prohibited, contrary to the wishes of many banking institutions.

Banking industry groups have advocated for stricter regulations on stablecoin rewards, citing that cryptocurrency companies often offer higher yields than traditional bank accounts. For instance, Coinbase offers customers up to a 3.5% yield on USDC balances, while the average traditional savings account yields approximately 0.38%, according to data from the Federal Deposit Insurance Corporation.

Banks fear that if stablecoins and their associated exchanges can offer more competitive yields, traditional bank customers might move their savings into the crypto market. This phenomenon, known as deposit flight, could reduce banks' lending capacity and, in a worst-case scenario, lead to bank closures or failures. The debate over the potential impact of stablecoins on the traditional banking sector was a significant point of contention during the drafting of the CLARITY Act.

The American Bankers Association, a prominent industry lobby group, stated that the OCC's decision jeopardizes "the funds banks use to make the loans that drive the U.S. economy." The association argued that the rule "will preserve the status quo for crypto platforms despite Congress’s clear intent to protect local lending."

Consumer advocacy groups have also raised concerns, noting that consumers might misinterpret these interest-like reward systems as equivalent to traditional bank accounts, which are protected by deposit insurance. Unlike bank accounts, stablecoin holdings lack equivalent federal deposit insurance.