The Securities and Exchange Commission is moving to formalize a prohibition on stablecoin issuers paying yield to holders, a proposal that threatens to draw a sharp line between traditional banking products and the rapidly growing stablecoin sector. The measure, reported by The Information, would codify restrictions that crypto companies have long feared, potentially stifling one of the most commercially attractive features of digital dollar tokens at a moment when the industry thought Washington was finally warming to its cause.
The proposal comes amid a broader legislative push in Congress to establish a federal framework for stablecoins — digital tokens pegged to the U.S. dollar and typically backed by Treasury bills, cash, and cash equivalents. But while the GENIUS Act and the STABLE Act have advanced through committees with bipartisan support, the SEC appears intent on ensuring that stablecoins do not morph into de facto interest-bearing deposit accounts, a function reserved for licensed banks under existing law.
A Regulatory Line in the Sand on Interest Payments
At the heart of the SEC’s proposed rule is a straightforward but consequential determination: stablecoins that pay yield to holders look less like payment instruments and more like securities. Under the Howey test — the Supreme Court’s longstanding framework for identifying investment contracts — a digital asset that promises returns derived from the efforts of a third party can be classified as a security. The SEC’s position is that a stablecoin issuer investing reserves in Treasury bills and passing along interest to token holders creates precisely this kind of arrangement.
The distinction matters enormously. If a stablecoin is classified as a security, its issuer must register with the SEC, comply with disclosure requirements, and operate under a regulatory regime designed for investment products rather than payment systems. That would dramatically increase compliance costs and could render many current stablecoin business models unworkable. The proposed rule would effectively prevent issuers like Circle, the company behind USDC, or Tether, the issuer of the world’s largest stablecoin, from distributing any portion of reserve income directly to holders.
The Billions at Stake in Stablecoin Reserve Income
The financial stakes are enormous. Tether reported a profit of approximately $13 billion in 2024, the vast majority of which came from interest earned on its reserves, which are heavily invested in short-term U.S. government debt. Circle, which filed for an initial public offering earlier this year, disclosed that it earned roughly $1.7 billion in reserve income in 2024. Neither company currently passes yield through to ordinary holders, but the pressure to do so has been mounting as competitors and DeFi protocols have begun offering yield-bearing stablecoin products.
Companies like Ethena, Mountain Protocol, and others have developed tokens that explicitly offer holders a return, often derived from staking strategies or Treasury-backed reserves. These products have attracted billions in deposits from crypto-native users seeking dollar-denominated returns without the friction of traditional banking. The SEC’s proposed rule would place these offerings squarely in the crosshairs, potentially forcing them to register as securities or cease operations in the United States.
Congressional Intent Versus Regulatory Ambition
The timing of the SEC’s move has raised eyebrows on Capitol Hill. The GENIUS Act, which passed the Senate Banking Committee in March with an 18-6 vote, explicitly defines “payment stablecoins” as digital assets that do not pay yield, interest, or profits to holders. The bill’s sponsors, Senators Bill Hagerty and Kirsten Gillibrand, designed the legislation to create a clear regulatory category for non-yield-bearing stablecoins while leaving open the question of how to treat yield-bearing variants.
But the SEC’s proposal goes further than merely aligning with congressional intent. According to The Information, the agency is seeking to tighten the yield ban in ways that could affect not just direct interest payments but also indirect mechanisms through which stablecoin holders might receive economic benefits. This could encompass loyalty programs, rebate structures, or tiered fee arrangements that function as de facto yield — a broad interpretation that has alarmed industry participants.
Industry Pushback and the Lobbying Battle Ahead
The crypto industry’s response has been swift and pointed. Trade groups including the Blockchain Association and the Digital Chamber of Commerce have argued that prohibiting stablecoin yield will push innovation offshore, where regulators in jurisdictions like the European Union, Singapore, and the United Arab Emirates have been more accommodating. They contend that American consumers will be denied access to competitive financial products while foreign issuers capture market share.
Circle CEO Jeremy Allaire has publicly advocated for a regulatory framework that permits yield distribution under appropriate consumer protections. In a post on X earlier this year, Allaire wrote that “the question isn’t whether stablecoins should offer yield — it’s whether we build the right safeguards around it.” The company’s S-1 filing with the SEC, submitted in April 2025, disclosed that Circle has been in ongoing discussions with regulators about the treatment of reserve income and the potential for future yield-bearing products.
The Banking Industry’s Quiet Influence
Behind the regulatory debate lies a less visible but powerful force: the traditional banking lobby. Banks have watched with growing unease as stablecoins have attracted hundreds of billions of dollars in deposits — funds that might otherwise sit in bank accounts earning interest for the institutions that hold them. The total stablecoin market capitalization exceeded $230 billion in early 2025, according to data from CoinGecko, representing a significant pool of dollar-denominated value that exists outside the banking system.
If stablecoin issuers were permitted to pay yield, the competitive threat to banks would intensify considerably. A stablecoin offering even a modest return — say, 3% to 4% annually, derived from Treasury bill income — would compare favorably to many savings accounts, particularly at large banks that have been slow to raise deposit rates. The American Bankers Association has lobbied aggressively for stablecoin legislation that maintains the yield prohibition, arguing that allowing non-bank entities to offer interest-like returns without bank-level regulation would create systemic risk and an uneven playing field.
How DeFi Protocols Are Complicating the Picture
The SEC’s proposal also faces a practical enforcement challenge: decentralized finance protocols that operate without a central issuer. Platforms like Aave and Compound allow users to lend stablecoins and earn yield through smart contracts, with no single entity controlling the process. While the SEC has taken enforcement actions against centralized lending platforms — most notably its case against Coinbase over its now-defunct Lend program — applying securities law to fully decentralized protocols presents thorny jurisdictional and constitutional questions.
Some legal scholars have argued that the SEC’s approach risks creating a two-tier system in which centralized, U.S.-based issuers are barred from offering yield while decentralized protocols and offshore competitors face no such restrictions. This could accelerate the migration of stablecoin activity to less regulated venues, undermining the very consumer protection goals the SEC seeks to advance. Georgetown Law professor Chris Brummer, a leading voice on digital asset regulation, has noted that “regulatory arbitrage is the predictable consequence of rules that apply only to entities within easy jurisdictional reach.”
What Comes Next for Stablecoin Regulation
The SEC’s proposal is expected to undergo a public comment period before any final rule is adopted, giving industry participants and other stakeholders an opportunity to weigh in. Meanwhile, the GENIUS Act faces its own uncertain path through the full Senate and the House, where competing priorities and political dynamics could delay passage. The STABLE Act, a House companion bill, takes a somewhat different approach to the yield question, and reconciling the two measures will require negotiation.
SEC Chair Paul Atkins, who assumed the role in April 2025 after being nominated by President Trump, has signaled a desire to provide regulatory clarity for digital assets while maintaining investor protections. Atkins has been viewed as more sympathetic to the crypto industry than his predecessor, Gary Gensler, but the yield ban proposal suggests the agency is not prepared to give stablecoin issuers a blank check. The tension between encouraging innovation and preventing regulatory evasion will define the next chapter of stablecoin policy in the United States.
For now, the largest stablecoin issuers continue to pocket reserve income themselves rather than sharing it with holders. Tether’s extraordinary profitability — rivaling that of major Wall Street firms — has become a source of both admiration and resentment within the crypto industry. If the SEC’s rule is finalized as proposed, that dynamic will persist, ensuring that the billions generated by stablecoin reserves flow to issuers and their shareholders rather than to the millions of individuals and institutions that hold the tokens. Whether that outcome serves the public interest or merely protects incumbent financial institutions is the question that will animate this debate for months to come.
