NEW YORK — Federal regulators announced on Wednesday that cryptocurrency firms are permitted to offer rewards similar to interest to their customers. This decision comes even in light of concerns from traditional banks about the potential withdrawal of significant funds from the banking sector.
These regulations stem from the enactment of the GENIUS Act, passed last year, which aimed to establish a framework for the governance of stablecoin issuers.
According to guidelines released by the Office of the Comptroller of the Currency, companies that issue stablecoins, like Circle, will still be barred from offering interest to users holding their coins. However, exchanges that facilitate the trading and custody of these stablecoins, including Coinbase and Robinhood, can distribute any earnings derived from these coins as rewards resembling interest.
Stablecoins are a particular type of cryptocurrency aimed at maintaining a fixed value, typically equivalent to $1 per coin. They are underpinned by bank deposits and U.S. Treasury securities that accrue interest.
The interest generated from the assets supporting stablecoins is central to the current tensions between banks and the crypto sector. The cryptocurrency industry seeks to provide customers with returns by transforming the interest earned on the bonds and cash backing stablecoins into rewards for users.
As per the new OCC guidelines, this practice can be executed “on a case-by-case basis,” according to regulators, indicating they have not placed a blanket prohibition as banks had requested.
Banking associations have advocated for stricter regulations regarding stablecoin rewards, citing that cryptocurrency firms often provide higher returns on savings compared to traditional banking accounts. For instance, Coinbase advertises yields as high as 3.5% on USDC holdings, while the average yield for traditional savings accounts sits at just 0.38%, based on recent data from the Federal Deposit Insurance Corporation.
If stablecoins and exchanges manage to offer better yields than banks, there is a risk of deposit flight, where customers might shift their savings from bank accounts into cryptocurrencies. The banking sector argues this could diminish their lending capacity and, in the worst-case scenario, lead to bank closures or failures. Discussions around the CLARITY Act highlighted this impact of stablecoins on traditional banking.
The American Bankers Association, representing the banking industry, stated that the OCC’s ruling jeopardizes “the funds banks use to support loans essential for the U.S. economy.”
The ABA further claimed that the new rule “will maintain the current scenario for crypto platforms, contrary to Congress’s intent to safeguard local lending.”
Interestingly, banks and consumer advocacy organizations, typically at odds over financial regulations, have found common ground on this issue. Consumer advocates worry that the interest-like rewards in the crypto realm may mislead consumers, making them believe these offerings are akin to traditional bank accounts. However, the cryptocurrency world lacks deposit insurance, such as that provided by the Federal Deposit Insurance Corporation.
“(The OCC) has established a rule that allows stablecoin issuers to engage in banking-like activities without the safeguards that protect our financial system,” stated Phillip Basil, director of economic growth and financial stability at Better Markets.