Federal bank regulators said Wednesday that cryptocurrency companies can continue offering customers interest-like rewards despite banks' warnings about potentially losing trillions of dollars in deposits. The Office of the Comptroller of the Currency (OCC) published the rules as part of implementing the GENIUS Act. The act became law last year to establish a regulatory framework for stablecoin issuers.
The rules continue to bar stablecoin issuers such as Circle from paying interest directly to people who hold the coins. However, exchanges such as Coinbase and Robinhood can distribute earnings from stablecoins to customers through interest-like rewards. Regulators said exchanges can offer these rewards on a "case-by-case basis". Banks had sought a prohibition on the practice.
Stablecoins are cryptocurrencies intended to keep a consistent value, usually $1 per coin. Bank deposits and U.S. Treasuries that back stablecoins generate interest. The cryptocurrency industry wants customers who hold stablecoins to receive a yield derived from the interest issuers earn on the backing assets. The competing claims over that interest are central to the dispute between banks and cryptocurrency companies.
Banking groups have sought stronger limits on stablecoin rewards because cryptocurrency companies can, and frequently do, offer higher savings yields than traditional bank accounts. Coinbase offers customers up to 3.5% on USDC balances. The Federal Deposit Insurance Corporation's latest figures put the average traditional savings account yield at 0.38%. Customers could transfer savings from banks to cryptocurrency if stablecoins and exchanges offer better yields, a process known as deposit flight. The banking industry has warned that deposit flight would reduce banks' ability to lend and, in a hypothetical worst case, could force some banks to close or fail. Stablecoins' potential effects on traditional banking prompted intense debate during the drafting of the CLARITY Act.
The American Bankers Association said the OCC's decision will endanger the money banks use to finance lending across the U.S. economy. The association argued that the rule maintains existing conditions for cryptocurrency platforms despite what the association described as Congress's clear intention to safeguard local lending.
Banks and consumer advocacy groups have aligned on stablecoin rewards despite usually opposing each other on financial regulation. Consumer groups worry that customers will regard the rewards as equivalent to interest on bank accounts. Cryptocurrency has no equivalent of deposit insurance of the kind the Federal Deposit Insurance Corporation provides. Phillip Basil, director of economic growth and financial stability at Better Markets, said the OCC's rule lets stablecoin issuers perform banking activities without the safeguards that protect the banking system.