Banking and Finance Law Daily Wrap Up, FINANCIAL TECHNOLOGY—Congressional Report cites issuer, exchange business model that bypasses stablecoin yield restriction, (Mar 10, 2026)

By A. Bryan Gerepka

The term "holder" is not defined in the GENIUS Act, leaving ambiguity about whether the yield ban applies to exchanges or retail investors.

Loopholes in the GENIUS ACT may allow some issuers to bypass the yield payment restrictions on stablecoins, according to a Congressional Research Service report authored by Paul Tierno and Marc Labonte. Disagreements about what constitutes yield have stymied the U.S. Senate’s efforts to complete implementing legislation, and ambiguity about the term “holder” as defined in the GENIUS Act may allow some issuers and exchanges to forge ahead with business models that allow payments to investors. The GENIUS Act, passed into law in July 2025, restricts stablecoin issuers from paying interest, yield, or rewards (yield) to stablecoin holders.

The authors highlighted a three-party model arrangement that stablecoin issuers can use to bypass yield restrictions. Issuers of stablecoins typically sell to exchanges and larger market participants, the authors noted. Meanwhile, most current retail use of stablecoins occurs on a cryptocurrency exchange. Under this model, the stablecoin issuer pays interest on the reserves held at the exchange, and the exchange then pays a yield on the stablecoin it holds in custody on behalf of a retail investor.

“GENIUS does not explicitly prevent exchanges from paying rewards on stablecoins held on their exchange,” the authors wrote. These rewards can be “structured to be effectively equivalent to yield—and many do,” the analysis added. The authors cited a regulatory filing from USD stablecoin issuer Circle, which stated that it pays a portion of the interest it earns on its reserves to Coinbase, proportionate to the stablecoins held on the exchange’s platform. Coinbase is the largest U.S.-based cryptocurrency exchange.

Ambiguous definition. At the same time, the authors noted that Section 4 of GENIUS states that “[n]o permitted 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.” However, the authors noted, the GENIUS Act did not define the term “holder,” so it remains to be seen whether the yield ban will be applied to the intermediary that bought and acts as a custodian, or the investor that owns the coin in the three-party model. In addition, some issuers reportedly pay exchanges a marketing budget, which can be used at the exchanges’ discretion. If the term “holder” is defined by future legislation or litigation to include an exchange (as some have argued) or find the status quo in violation of the yield ban, this could limit issuers’ ability to pay yield, the authors stated. Moreover, if the ban excludes the three-party model, Congress could consider a blanket ban on yield to close this perceived “loophole.” However, since exchanges also pay investors yield to lend out their holdings, this type of yield could potentially be caught up in a blanket ban. Although this arrangement also raises policy issues, it has not been the focus of legislative proposals, the authors wrote.

Crypto industry, banks debate yield. The effect on the banking industry is not clear-cut, the authors stated. Deposits and stablecoins are not perfect substitutes. However, if consumers substitute stablecoins for deposits on a large scale, it may reduce credit availability and increase systemic risk in the financial system, they added.

Banks favor a strict prohibition on paying interest on stablecoins, while the crypto industry views the banks’ stance as anticompetitive. Banks also argue that stablecoins could benefit from regulatory arbitrage, as issuers face less costly and far-reaching regulatory requirements than banks. However, the authors noted that stablecoin issuers are permitted to engage in far more limited activities than banks and play a more limited role in the financial system.

The authors noted that banks may create a consortium, such as a clearinghouse, to manage settlement that replicates the three-party model that is eligible to pay interest. However, in situations where the customer self-custodies at a bank that issues stablecoins, the issuer is prohibited from paying interest.

Congressional developments. In the wake of bank opposition to the yield loophole, the Senate Banking Committee’s crypto market structure draft in January 2026 sought to reconcile the differences. The draft included a provision strengthening the restriction, prohibiting exchanges from paying yield on holdings, but permitted them to pay rewards on transactions using stablecoins. On January 14, 2026, Coinbase pulled support for the bill, in part over the provision, furthering the appearance that the two industries’ views are irreconcilable. On the same day, a scheduled markup of the draft was indefinitely postponed, leaving the status of the legislation unclear. The House-passed market-structure bill, H.R. 3633, does not have a stablecoin yield provision.

Cost-benefit tradeoff. Overall, there are costs and benefits to prohibiting stablecoin yield, the authors stated. It makes stablecoin investors immediately worse off, as issuers are likely to retain the yield that would have been paid to them, they observed. At the same time, stablecoins are prone to run risk because of their fixed value. Since stablecoins do not have federal guarantees or Federal Reserve discount window access, policymakers might be tempted to provide ad hoc government bailouts—as they did to prevent money market fund runs in 2008 and 2020—to restore financial stability following a run. A belief that stablecoins will be bailed out may lead to a greater migration from deposits to stablecoins.

Banning yield will lead to slower stablecoin market growth, and bank funding will be more stable, potentially limiting improvements to retail payments, as well as reducing systemic risk, the authors stated. While the GENIUS Act included provisions to protect consumers and mitigate systemic risk, those provisions may be inadequate, and the effectiveness of stablecoin regulation—notably, state regulation—is untested, the authors concluded.

Companies: Circle; Coinbase

LegislativeActivity: BankingOperations FinancialIntermediaries FinancialStability FinTech