The controversial issue in the CLARITY Act, the Digital Markets Clarity Act: Should stablecoins be allowed to generate interest income?
- Core Argument: U.S. stablecoin regulation is shifting from a total ban on interest-bearing features to a classification-based approach. By distinguishing between “passive yield” and “activity-based yield,” it aims to balance financial stability and innovation. However, the difficulty of implementing an “economic equivalence test” may lead to market circumvention and a regulatory “whack-a-mole” dilemma, marking a regulatory evolution from “entity-based oversight” to “ecosystem-based oversight.”
- Key Elements:
- The GENIUS Act had a blanket prohibition on stablecoin issuers paying any form of interest or yield, aiming to prevent stablecoins from replacing bank deposits and triggering financial instability.
- The market quickly created effectively equivalent interest-bearing yields in secondary markets and DeFi protocols through governance rewards, liquid staking, and other methods, circumventing issuer-side regulation.
- The CLARITY Act introduces the Tillis-Alsobrooks Compromise, which prohibits yields generated solely from “passive holding” but allows rewards linked to genuine on-chain activities (such as providing liquidity or governance staking).
- The bill proposes an “economic equivalence test” to determine whether behavioral rewards are essentially equivalent to bank deposit interest, but lacks specific quantitative standards, resulting in blurred boundaries.
- Regulatory bodies (CFTC/SEC) would need to audit DeFi smart contracts to assess whether yields are substantively equivalent to deposit interest, a task far exceeding their traditional enforcement capabilities.
- Future regulation will shift towards “ecosystem-based oversight,” involving continuous substantive review of the entire value chain, potentially ending the industry's early years of disorderly expansion, the “pioneering” phase.
This year, on March 20th, the Senate Banking Committee reached a legislative compromise—the Tillis-Alsobrooks compromise. This bipartisan agreement on the CLARITY Act addresses the biggest conflict between the banking and crypto industries over the past year: Should stablecoins be allowed to generate yield? From an initial blanket prohibition to the current classification of yield-bearing activities, regulatory attitudes are evolving.
1. Before CLARITY: What Was the GENIUS Act's Stance on Stablecoins?
To understand the CLARITY Act, we must first revisit the GENIUS Act (Pub. L. 119-27), passed last year.
Aiming to prevent financial shocks like the TerraUSD collapse, the core objective of the GENIUS Act was clear: to prevent stablecoins from becoming substitutes for bank deposits, thereby averting deposit outflows and credit contraction in the traditional banking system. To achieve this macro-prudential goal, legislators adopted a blanket prohibition on yield generation at the issuer level.
According to 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.”
Earlier this year, in February, the Office of the Comptroller of the Currency (OCC) developed anti-circumvention provisions in its proposed rule (OCC NPRM), including a "rebuttable presumption" and a "reversal of the burden of proof," to prevent issuers from indirectly distributing yield to users through affiliates or third-party white-label partners.
Under this legal framework, a Payment Stablecoin would be strictly defined as a sterile payment instrument, fully backed by high-quality liquid assets (like short-term U.S. Treasuries and cash), and offering no yield.
2. Yield Migration: From Issuers to Secondary Markets
However, for the crypto market, demand for yield persists as long as there are interest spreads in the underlying assets. Since the GENIUS Act's jurisdiction only extends to "stablecoin issuers," the market quickly shifted yield-generating activities from the issuance end to secondary markets (like exchanges) and DeFi protocols, which fall outside the law's immediate reach. Examples of such yield methods include:
Governance Rewards: DeFi protocols distribute returns generated from underlying reserve assets to users under the guise of "governance token rewards."
Liquidity Rewards and Staking: Users deposit non-yielding stablecoins into lending protocols or liquidity pools, receiving "wrapped tokens" that carry yield-bearing attributes.
On the surface, these two methods reward users for participating in network activities (e.g., voting, providing liquidity). Yet, many protocols are designed such that users can obtain returns economically equivalent to passive bank interest by expending minimal effort (e.g., voting once a year or auto-delegating).
3. A New Approach: Classification of Yield in the CLARITY Act
The goal is to navigate between protecting the traditional banking system and macro-prudential stability on one hand, and preventing overly strict rules from stifling financial innovation on the other.
Under the Tillis-Alsobrooks compromise, regulators will attempt to distinguish and regulate different types of stablecoin yield at the market level:
Prohibited: "Passive Yield": If a user receives yield solely because they are "passively holding" a stablecoin balance in their account, it will be strictly prohibited.
Permitted: "Activity-Based Yield": Rewards tied to genuine crypto-native network activities are exempted. This includes providing liquidity to automated market makers, merchant payment routing rebates, or genuine protocol governance and staking.
To define the boundary between the two, the legislation introduces a test: the "Economic Equivalence Test." Permitted activity-based rewards:
must not be economically or functionally equivalent to interest payments on an interest-bearing bank deposit.
In other words, future regulators will gradually adopt a regulatory strategy focused on substantive review.
4. A New Challenge: Does Regulatory Capacity Match the Need for Substantive Review?
While this novel regulatory approach appears to be legislative progress, we must further consider:
Will regulators truly have the capacity to identify such activities in the future?
First, identifying technical "disguises" will be a key compliance challenge.
In the market, the line between "activity-based" and "passive holding" is extremely blurry. Consider the governance reward issue mentioned earlier: if a smart contract requires the user to click "authorize" just once to continuously receive a share of the returns, it can be commercially explained as "participation in an activity." Yet, in economic substance, it is undoubtedly "passive yield." An "Economic Equivalence Test" lacking clear quantitative indicators (e.g., minimum voting participation rate or risk-taking ratio) is highly questionable. In the near future, we will likely witness a game of "whack-a-mole" where the market continuously restructures new business models to formally meet the legal definition of "activity/behavior" while being economically equivalent to "passive interest."
Second, the "Economic Equivalence Test" likely exceeds the current enforcement capabilities of regulators.
Traditional financial regulation involves reviewing institutional contracts and accounts. Under the new CLARITY framework, CFTC or SEC enforcement personnel would need to audit the underlying smart contracts of DeFi protocols to assess whether a liquidity pool's returns meet the definition of "deposit interest." This simultaneously demands technological expertise and the ability to calibrate regulatory standards. In my view, regulatory agencies currently lack such identification capabilities.
Conclusion: From "Entity-Based" to "Ecosystem-Based" Regulation
Looking further ahead, when financial functions are disassembled and dispersed, even decentralized, across countless nodes, how will regulatory approaches change? If market participants can use blockchain features and financial engineering to package "passive deposits" as "activity rewards," the regulatory response will inevitably move towards "ecosystem-based regulation." While market oversight in the blockchain industry will become more certain and stable, the entire industry will also gradually bid farewell to the era of rapid, unfettered expansion of the past.
About Corundum
Corundum is an independent research brand focused on AI Governance, Web3 Regulation, and Digital Finance, with a long-term emphasis on global digital asset regulation, AI governance, stablecoins, RWAs, and the development of digital financial infrastructure.
Corundum is dedicated to providing practitioners, investors, startups, and policy researchers with original, long-term value research content through legal analysis, policy research, and comparative law perspectives, continuously tracking the evolution of the global digital economy regulatory system.
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Disclaimer
This article represents the author's personal research views only. It is intended for learning, exchange, and discussion purposes and does not constitute legal advice, investment recommendations, or any other professional advice. Readers should make independent judgments based on their own circumstances and consult relevant professionals when necessary.
