US banking regulator shuts down stablecoin yield loophole

US banking regulator, SEC, moved to shut down stablecoin yield loophole in its latest proposed rulemaking framework for GENIUS compliant stablecoins.

Key passage and takeaways in the latest OCC's proposed GENIUS rulemaking framework re stablecoin yield restriction👇

1️⃣ OCC's Hard Line: No Yield

Proposed §15.10(c)(4):

"A permitted payment stablecoin issuer must not 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"

This appears to be a hard prohibition and applies to any form of yield: cash, tokens, or other consideration.

The trigger condition is yield paid solely for holding, using, or retaining the stablecoin.

2️⃣ OCC Anticipates Evasion Attempts: and Shuts it Down

Yield is presumed to be paid if:

- The issuer pays interest or yield to an affiliate or related third party; and

- That affiliate or related third party pays interest or yield to stablecoin holders

"Related third party" include:

- Any person offering to pay interest or yield to holders as a service

- White-label partners where the issuer issues under another brand

Foreign payment stablecoin issuers registered with the OCC face the same prohibition.

3️⃣ What is Still Permissible

- Merchants independently offering discounts for payment stablecoin use is not considered yield

- Profit-sharing in white-label arrangements is not automatically prohibited if not structured as yield

The most important feature is the profit-sharing arrangement between stablecoin-as-a-service issuers and their corporate customers. Think Paxos (white-labeled platform) and PayPal (corporate customer). While PayPal can still run the NIM business based on PYUSD's reserve as float, it will have issue actually maintain any sizeable market cap for the PYUSD product as the 4% yield/reward on users' deposits at PayPal disappears.

➡️ Implications for stablecoin business & banks

- Stablecoins are being codified as payment rails, not digital savings accounts in the US

- Stablecoin as a service platforms lose their most salient selling point to SMEs or corporates in the US - park your USD here instead of the banks to earn yield and we will take care of instant payment when you need it.

- Tokenized bank deposits looks to be the default option for corporates who want yield (banks can offer instant tMMF product as a yield solution or just hike interest paid) + payment functionality inside the regulated banking perimeter.

This is great from a balance sheet liquidity treatment perspective. More here.

- The stablecoin store-of-value feature still remains strong in high-volatility EM markets. 

➡️ Of course, there is a 60 days comment period where the OCC asks:

- Should the prohibition be broader? 

- Should “yield” be further defined? 

- Should there be a de minimis exception?

- What economic impact would narrow vs broader prohibition have?

This is structural policy guardrails being built. Stay tuned.

You can find the Fast Take on other key aspects of the OCC rulemaking proposal here.

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