Controversial Issues in the Digital Markets Clarity Act (CLARITY Act)—Whether Stablecoins Are Allowed to Earn Interest

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On March 20 this year, the Senate Banking Committee reached a legislative compromise—the Tillis-Alsobrooks compromise. This bipartisan agreement on the CLARITY Act responds to the biggest clash between the banking industry and the crypto industry over the past year: whether stablecoins should be allowed to generate yield. From an initial blanket ban to today’s interest-earning classification regime, the regulator’s stance is shifting.

I. Before CLARITY: What was GENIUS Act’s stance on stablecoins?

To understand the CLARITY Act, we first need to revisit last year’s “United States Stablecoin National Innovation Guidance and Establishment Act” (GENIUS Act, Pub. L. 119-27), which was passed.

To prevent financial-shock events like the collapse of TerraUSD, the core goal of the GENIUS Act was very clear: to prevent stablecoins from becoming a substitute for bank deposits, thereby triggering deposit outflows from traditional banking and a contraction of credit. To achieve its macroprudential objective, lawmakers implemented a one-size-fits-all prohibition on interest-earning at the issuance end.

Pursuant to the explicit language in Section 4(a)(11) of the GENIUS Act:

“No permitted payment stablecoin issuer or foreign payment stablecoin issuer shall pay the holder of any payment stablecoin any form of interest or yield (whether in cash, tokens, or other consideration) solely in connection with the holding, use, or retention of such payment stablecoin.”

“任何获许可的支付稳定币发行人或外国支付稳定币发行人，不得仅仅因为持有、使用或保留支付稳定币，而向其持有者支付任何形式的利息或收益（无论是现金、代币还是其他对价）”。

In February this year, the Office of the Comptroller of the Currency (OCC), in its proposed rule (OCC NPRM), developed anti-circumvention provisions with “rebuttable presumptions” and “shifting the burden of proof,” to block issuers from indirectly distributing payments to users through related parties or third-party white-label partners.

Under this legal framework, payment stablecoins would be strictly limited to: a sterile payment instrument that is purely for payment and earns no yield, supported 100% by high-quality liquid assets (such as short-term U.S. Treasuries and cash).

II. Earning yield behavior: shifting from issuers to the secondary market

But for the crypto market, as long as the underlying assets have spreads, the demand for yield will not stop. Because the jurisdictional boundary of the GENIUS Act only stays with “stablecoin issuers,” the crypto market quickly moved yield-earning actions from the issuance end to secondary markets beyond the law’s reach (such as exchanges) and DeFi protocols. For example, the following yield methods:

Governance rewards: DeFi protocols allocate the yield generated by underlying reserve assets to users under the label of “governance token rewards.”

Liquidity rewards and staking: Users deposit interest-free stablecoins into lending protocols or liquidity pools in exchange for “packaged tokens” that carry yield attributes.

On the surface, these two yield-earning methods reward user participation in network building (such as voting and providing liquidity). In practice, however, many protocols only require users to bear very low costs (e.g., voting once a year, or automatic delegation) to obtain gains that are, in substance, equivalent to passive bank interest.

III. A new approach: categorizing yield-earning in the CLARITY Act

On one hand, to protect the traditional banking industry and meet macroprudential requirements; on the other hand, to prevent overly strict rules from stifling financial innovation.

Under the Tillis-Alsobrooks compromise, regulators will try to distinguish and regulate stablecoin yield-earning at the market level:

Prohibit “passive income”: If users receive yield merely because the user “passively holds” a stablecoin balance in their account, it will be strictly prohibited.

Allow “behavior/activity income”: Exempt rewards tied to users’ real crypto-native network activities, such as providing liquidity for automated market makers, merchant payment routing cashback, or genuine protocol governance and staking.

To define the boundary between the two, the bill introduces a test: an “economic equivalence test,” i.e., the allowed behavior rewards:

不得在经济上或功能上等同于生息银行存款的利息支付。

not economically or functionally equivalent to the payment of interest or yield on an interest-bearing bank deposit.

In other words, regulators in the future will gradually adopt a substantive review regulatory strategy.

IV. New question: Is regulatory capability sufficient to conduct substantive review?

The new regulatory strategy above appears, at face value, to be legislative progress, but we must think further:

Will regulators truly have the capability to identify this kind of behavior in the future?

First, how to determine technical “camouflage” will be a difficult compliance challenge.

In the market, the boundary between “behavior/activity” and “passive holding” is extremely blurry. As mentioned earlier in the governance rewards issue, if a smart contract requires users to authorize with just a single click, after which it continuously distributes revenue shares, it may be explained commercially as “participation in activities,” but economically it is unquestionably “passive yield.” Without clear quantitative indicators (such as a minimum voting participation rate or the proportion of risk-bearing), the economic equivalence test is highly questionable. In the near future, we will see round after round of “whack-a-mole,” where the market can always redesign new business models that comply with the legal definition of “activity/behavior,” while being, in economic substance, nothing more than “passive interest.”

Second, the economic equivalence test far exceeds the current enforcement capability of regulators.

Traditional financial regulation only needs to review an institution’s contract accounts and similar records. Under the CLARITY Act’s new framework, it would require CFTC or SEC enforcement personnel to audit DeFi protocols’ underlying smart contracts and assess whether liquidity pool returns fail to meet the definition of “deposit interest.” This requires both technical competence and the ability to set regulatory standards. In my view, regulators currently do not seem to have such identification capability.

Conclusion: Moving from “entity-based regulation” to “ecosystem-based regulation”

When we look further into the future—when financial functions are broken apart and dispersed, even decentralized across countless nodes—how will regulation change? If market participants can wrap “passive deposits” as “activity rewards” by leveraging blockchain characteristics and financial engineering, then the response by regulators will necessarily move toward “ecosystem-based regulation.” Regulatory issues in the blockchain industry will become more certain and stable. At the same time, the entire industry will gradually move on from the past years of a rapid, frontier-expansion era.

About Corundum

Corundum (ruby/corundum) is an independent research brand that has long focused on AI Governance, Web3 Regulation, and Digital Finance, concentrating on the development of global digital-asset regulation, artificial-intelligence governance, stablecoins, RWA, and digital-finance infrastructure.

Corundum is committed to providing industry practitioners, investment institutions, startup teams, and policy researchers with original research content of long-term value through legal analysis, policy research, and comparative-law perspectives, while continuously tracking the evolution of global digital economy regulatory systems.

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Disclaimer

This article only represents the author’s personal research views, for learning, exchange, and discussion purposes only, and does not constitute any legal advice, investment advice, or other professional advice. Readers should make independent judgments based on their own circumstances and, when necessary, consult relevant professionals.