A simmering policy debate in Washington over whether stablecoin issuers should be allowed to pay interest has burst into the open.
Bank of England softens on stablecoins
Coinbase and the Blockchain Association have launched a campaign arguing that the United States’ new GENIUS Act unfairly restricts innovation.
The banking industry, led by the Bank Policy Institute (BPI), has pushed back — accusing crypto lobbyists of misrepresenting both the law and the risks that interest-bearing stablecoins could pose to financial stability.
At its core, the issue is about what a stablecoin really is: a payments tool or a deposit-taking instrument.
The GENIUS Act, enacted earlier this year, draws a firm line between the two by prohibiting stablecoin issuers from paying interest to holders.
This was designed to prevent stablecoins from operating as de facto banks without the accompanying regulatory safeguards.
Yet, crypto firms are now testing the boundaries of that rule by offering “rewards” that, in practice, behave like interest payments.
The semantics of “rewards”
Coinbase, Circle and other industry players have sought to reframe these payments as incentives rather than yield. In recent months, their public messaging has shifted markedly.
Coinbase CEO Brian Armstrong has at times argued that stablecoins should be allowed to deliver “onchain interest,” likening them to high-yield savings accounts — but without what he calls the “onerous” disclosure and tax requirements attached to traditional deposits.
Later, when regulatory scrutiny intensified, he claimed the company “doesn’t pay interest… we pay rewards.”
The distinction, however, is more rhetorical than real.
BPI and other financial institutions point out that stablecoin “rewards” are functionally equivalent to interest — regular payments to holders derived from income earned on reserve assets.
That makes them subject to the same prudential concerns as interest-bearing accounts.
Credit card rewards, often invoked as a comparison, are not analogous: they are based on spending activity, not on holding value.
Why the banking sector is wary
Banks’ opposition to interest-bearing stablecoins is not, as some crypto advocates claim, an attempt to quash competition.
The banking industry has consistently supported innovation through partnerships with fintech and blockchain firms.
Indeed, many US banks already collaborate with crypto companies to deliver faster settlements, digital asset custody and tokenisation services.
The real concern is systemic risk.
Stablecoins that pay interest but are not subject to the capital, liquidity and supervisory frameworks of banks could create shadow-banking vulnerabilities.
In the eyes of regulators, this risk echoes the collapse of money market mutual funds in 2008 and again during the 2020 liquidity crisis — both of which required government intervention.
The road to coexistence
Both sides claim to want the same outcome: innovation that expands access to efficient, low-cost payments. But their visions of the rules differ sharply.
Crypto firms argue for flexibility to reward users directly from the yield on reserve assets.
Banks insist that if a firm wishes to behave like a bank — taking deposits and paying interest — it must also shoulder the full regulatory burden, from capital adequacy to deposit insurance.
Ultimately, this debate is about where to draw the line between payments innovation and banking regulation.
As the digital asset ecosystem matures, clarity on that distinction will be essential to avoid repeating the mistakes of past financial crises.
Stablecoins may yet become a bridge between the crypto economy and traditional finance — but only if the structure supporting them is as stable as the name implies.
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