Summary
Section 404 (Tillis-Alsobrooks compromise) bans passive yield "economically or functionally equivalent" to bank deposit interest while permitting activity-based rewards tied to genuine platform use (transactions, participation, network activity). The core test turns on whether a reward is "solely in connection with the holding" of stablecoins or tied to bona fide activities. Treasury/SEC/CFTC must propose rules within 1 year defining qualifying activities. Banks (ABA) argue the compromise doesn't go far enough and want tighter restrictions. Cato Institute argues stablecoins are fundamentally different from bank deposits (100% reserve vs fractional) and the equivalence test is the wrong yardstick.
Key Points
- Prohibited: passive yield on stablecoin holdings — any return for simply holding, regardless of label
- Permitted: activity-based rewards tied to transactions, participation, network activity
- Anti-evasion: renaming yield as "rewards" doesn't exempt if economically equivalent to deposit interest
- Rulemaking: Treasury + SEC + CFTC must propose rules within 1 year of enactment
- Banks (ABA): want tighter restrictions, claim loophole allows bypassing GENIUS Act's ban on issuer-paid yield
- Cato: stablecoins are 100% reserve-backed (narrow bank / MMF equivalent), not fractional-reserve deposits
- Coinbase: preserved activity-based rewards — key to $1.35B annual USDC rewards revenue line
- GENIUS Act already bars issuers from paying yield; Section 404 adds intermediary-layer restrictions
- CLARITY Act odds: ~50% (Galaxy Research), down from 60% in early June; Polymarket 41-48%