U.S. Regulations End Passive Stablecoin Yields to Protect Bank Deposits

Users holding USDC on Coinbase may soon lose the 3.5% to 5% annual yield they currently receive. The CLARITY Act, a draft bill that expands bans on interest payments to all digital asset service providers, prohibits interest payments based on "idle balances."

This severing of passive income streams removes the primary user growth tool for centralized exchanges. The move is a direct result of $56.7 million in lobbying by the American Bankers Association to prevent stablecoin yields from competing with traditional bank deposits. Banks argue that if users can earn government bond-like yields on stablecoins without traditional banking regulations, up to $1.5 trillion in retail deposits could leave the commercial banking system. Standard Chartered estimates that without these prohibitions, the banking system could face a $500 billion funding gap by 2028.

While passive yields are banned, the CLARITY Act preserves rewards for "identifiable activities." Under Section 404(b)(2), rewards for providing liquidity, staking, and protocol validation are compliant. This creates a legal logic where income is treated as payment for service rather than a deposit.

DeFi-native stablecoins like USDe and USDe and USDS leverage this loophole. USDe generates yield through delta-neutral hedging and Ethereum staking rewards, framing these as compensation for risk management. USDS utilizes protocol revenue sharing and real-world asset returns to distribute rewards to users who provide liquidity. Because these mechanisms anchor asset value to on-chain activities, they do not qualify as bank deposit equivalents. Future stablecoin returns will belong to active contributors who participate in protocol activities rather than passive holders.