The true beneficiaries of Section 404: the latest interpretation of the CLARITY Act

Author: Merkle3s Capital; Source: X, @Merkle3sCapital

The headline and the main text discuss two different things

On May 2nd, the compromise text of Tillis-Alsobrooks was made public. Within 24 hours, the banks claimed victory, Coinbase CEO Brian Armstrong sent three words—Mark it up, and CLARITY Act passed on Polymarket with a probability jump of 9 percentage points to 55%. Everyone said they won.

This is not a balanced outcome satisfying all parties, but a signal: different ways of winning. The banks won the headline, the crypto industry won the provisions. To find the true beneficiaries, read the main text.

What exactly does Section 404 prohibit?

The scope of Section 404’s prohibition is surprisingly narrow. The core phrasing is: covered party (intermediary) shall not solely in connection with the holding pay any income that is economically or functionally equivalent to interest. Both keywords are indispensable. The prohibited entities are exchanges, custodians, and other intermediaries, while issuers (Circle, Tether) are explicitly excluded.

The evolution of the version reveals legislative intent: the January version’s headline was “Preserving Rewards for Stablecoin Holders,” with vague main text opposed by Coinbase; the May compromise version’s headline changed to “Prohibiting Interest and Yield on Payment Stablecoins”—giving the “prohibit” word to the banks—but the main text narrowed the definition and added three explicit exemptions. The headline concessions went to the banks, while the main text reserved space for the crypto industry.

Three types of exemptions: deliberate backdoors left by legislators

Interest is prohibited, but “收益因行动产生的收益” (revenue generated by actions) is protected. These three exemptions cover most real earning scenarios in the crypto industry:

1. Bona fide activities: transaction rebates, task rewards, payment incentives. Similar logic to credit card cashback—you’re spending, so you get cashback, not “holding equals interest.”

2. Market-making liquidity: DEX LP yield farming is explicitly protected. The revenue sources behind hundreds of billions in TVL on Uniswap are not restricted by Section 404.

3. Staking and margin earnings: staking yields, perpetual contract margin interest are within the exemption scope.

The common logic is: as long as there is economic activity supporting it, the earnings are legal. The legislators didn’t eliminate crypto earnings; they only require a nominal “labor” consideration.

The true beneficiaries ranking: DeFi > Top CEXs > Banks

DeFi—biggest winner

DeFi protocols are not “intermediaries,” so Section 404 has never applied to them from the start. The two types of exemptions—market-making and staking—directly cover DeFi’s core business models. More importantly, DeFi doesn’t need re-packaging—it was never within the scope of regulation, and the bill’s passage actually confirms this exemption status. Clear rules mean compliant funds are willing to come in.

Top CEXs—short-term pain, long-term gain

Taking Coinbase as an example, do some math: in 2025, stablecoin-related revenue is $1.35 billion, about 20% of net income. Of this, float (interest from holding user stablecoins in T-bills) belongs to Coinbase, and Section 404 does not affect this part. The restrictions only apply to “interest-bearing products,” which can be re-packaged as activity rewards through bona fide activities.

The core trade-off: sacrifice 30-50% of short-term yield product revenue for 10 years of legal status—shifting from the SEC’s gray area to a clear CFTC-regulated framework. Coinbase CLO Paul Grewal and CPO Faryar Shirzad have already indicated the direction: “Activity revenue generated by genuine platform participation is protected.”

The structure of winning for top exchanges and losing for small and medium ones is due to compliance costs: re-packaging yield products requires legal teams, compliance processes, and regulatory communication. Top CEXs have these capabilities; smaller exchanges do not. As a result, market share concentrates among the top—Section 404 creates a legislative moat for the major players.

The only risk: during the 12-month rulemaking phase after the bill’s passage, SEC + CFTC + Treasury will define the boundaries of “bona fide,” which is the real uncertainty.

Banks—won the headline, lost the narrative high ground

Banks achieved a textual victory with “Prohibiting Interest and Yield,” but there’s a structural irony: banks issuing stablecoins can pay deposit interest, while Circle issuing USDC cannot—both underlying assets are the same T-bill yields, but regulatory treatment differs completely. Congress has given the fastest-growing financial product an asymmetric advantage.

But banks underestimated one thing: Section 404 officially establishes the legal status of stablecoins. Banks keep their interest advantage but face opponents with legitimate licenses.

Key timeline

Sen. Bernie Moreno expects to complete the committee stage by the end of May; Sen. Cynthia Lummis used the phrase “now or never.” The legislative window still has 4-6 months, with different strategic considerations at each stage.

Conclusion

The essence of Section 404 is not “prohibiting interest,” but defining who can make money and how. Certainty itself is the biggest positive—before, every company’s legal team was gambling on regulatory interpretation; afterward, three types of exemptions can be invoked.

Beneficiary order: DeFi > Top CEX > Banks.

One-sentence summary: 404 is a permit, not a ban. Those who can adapt to the rules see it as a positive; those who cannot see it as a negative. DeFi and top CEXs are the former; smaller exchanges’ yield products and pure interest stablecoins are the latter—the 12-month window before rulemaking is the final buffer period.