This year, on March 20, a legislative compromise was reached in the Senate Banking Committee—the Tillis-Alsobrooks compromise. This bipartisan agreement on the CLARITY Act addresses the biggest conflict between the banking and crypto industries over the past year: Should stablecoins be allowed to generate yield? From an initial outright ban to the current policy of categorizing yield-generating activities, the regulatory attitude is changing.
I. Before CLARITY: What Was the GENIUS Act's Stance on Stablecoins?
To understand the CLARITY Act, we must first revisit last year's U.S. Stablecoin National Innovation Guidance and Establishment Act (GENIUS Act, Pub. L. 119-27).
To prevent financial shocks like the TerraUSD collapse, the GENIUS Act had a very clear core objective: to prevent stablecoins from becoming substitutes for bank deposits, thereby triggering deposit outflows and credit contraction in the traditional banking sector. To achieve this macroprudential goal, lawmakers adopted a "one-size-fits-all" strategy of prohibiting yield generation at the issuance level.
As clearly stipulated in Section 4(a)(11) of the GENIUS Act:
“No permitted payment stablecoin issuer or foreign payment stablecoin issuer shall pay the holder of any payment stablecoin any form of interest or yield (whether in cash, tokens, or other consideration) solely in connection with the holding, use, or retention of such payment stablecoin.”
"No permitted payment stablecoin issuer or foreign payment stablecoin issuer shall pay the holder of any payment stablecoin any form of interest or yield (whether in cash, tokens, or other consideration) solely in connection with the holding, use, or retention of such payment stablecoin."
In February of this year, the Office of the Comptroller of the Currency (OCC), in its proposed rule (OCC NPRM), developed "rebuttable presumption" and "burden-shifting" anti-evasion clauses to prevent issuers from indirectly distributing yield to users through affiliates or third-party white-label partners.
Under this legal framework, a payment stablecoin is strictly defined as: it can only be a sterile payment instrument—a yield-free tool backed 100% by high-quality liquid assets (such as short-term U.S. Treasuries and cash).
II. Yield-Generating Behavior: Shifting from Issuers to Secondary Markets
However, for the crypto market, as long as there is an interest rate spread on the underlying assets, the demand for yield will not cease. Since the jurisdiction of the GENIUS Act only extended to "stablecoin issuers," the crypto market quickly moved yield-generating activities from the issuance side to the legally untouched secondary markets (like exchanges) and DeFi protocols. Examples of such yield-generation methods include:
Governance Rewards: DeFi protocols distribute yield generated from underlying reserve assets to users under the guise of "governance token rewards."
Liquidity Rewards and Staking: Users deposit non-yield-bearing stablecoins into lending protocols or liquidity pools, receiving "wrapped tokens" with yield-bearing properties in return.
On the surface, these two yield-generation methods reward users for participating in network activities (like voting, providing liquidity). However, in reality, many protocol designs allow users to receive returns essentially equivalent to passive bank interest with minimal effort (e.g., voting once a year or automatic delegation).
III. A New Approach: Categorizing Yield in the CLARITY Act
On one hand, to protect the traditional banking sector and meet macroprudential requirements; on the other, to prevent overly strict rules from stifling financial innovation.
According to the Tillis-Alsobrooks compromise, regulators will attempt to distinguish between different types of stablecoin yield in the market for regulatory purposes:
Prohibition of "Passive Yield": If users receive yield solely because they "passively hold" a stablecoin balance in an account, it will be strictly prohibited.
Allowance of "Behavioral/Activity-Based Yield": Exemptions are granted for rewards tied to users' genuine crypto-native network activities, such as providing liquidity for automated market makers, receiving cashback from merchant payment routing, or genuine protocol governance and staking.
To define the boundary between the two, the bill introduces a test: the "Economic Equivalence Test." Permitted behavioral rewards must:
not be economically or functionally equivalent to the payment of interest or yield on an interest-bearing bank deposit.
not economically or functionally equivalent to the payment of interest or yield on an interest-bearing bank deposit.
This means future regulators will increasingly adopt a substantive review-based regulatory strategy.
IV. The New Problem: Is Regulatory Capacity Sufficient for Substantive Review?
While the new regulatory strategy mentioned above appears to be a legislative advancement on the surface, we must further consider:
Will regulators truly have the capability to identify such behavior in the future?
First, determining technical "disguise" will be a compliance challenge.
In the market, the line between "behavior/activity" and "passive holding" is extremely blurred. As mentioned earlier with governance rewards, if a smart contract only requires a user to authorize once and then continuously receive profit-sharing, it can be commercially explained as "behavioral participation," but in economic substance, it is undoubtedly "passive yield." The "Economic Equivalence Test" lacks clear quantitative indicators (e.g., minimum voting participation rate or risk-taking ratio), raising serious doubts. We are likely to see endless games of "whack-a-mole," where the market can always restructure new business models that meet the legal definition of "activity/behavior" while being economically "passive interest" in substance.
Second, the "Economic Equivalence Test" far exceeds current regulatory enforcement capabilities.
Traditional financial regulation only requires reviewing institutional contracts and accounts. Under the new CLARITY Act framework, it would require CFTC or SEC enforcement officers to audit DeFi protocol smart contracts and assess whether liquidity pool yields fall outside the definition of "deposit interest." This simultaneously demands both technical capability and regulatory discretion-setting ability. In my opinion, regulatory agencies currently do not seem to possess such identification capabilities.
Conclusion: From "Entity-Based Regulation" to "Ecosystem Regulation"
Looking further into the future, as financial functions are decomposed and dispersed, even decentralized across countless nodes, how will regulatory approaches change? If market participants can use blockchain characteristics and financial engineering to repackage "passive deposits" as "activity rewards," then the inevitable regulatory response will be a shift toward "ecosystem regulation." Market regulatory issues in the blockchain industry will become more certain and stable. On the other hand, the entire industry will gradually bid farewell to the wild, pioneering era of the past many years.
About Corundum
Corundum is an independent research brand focused on AI Governance, Web3 Regulation, and Digital Finance. It tracks the development of global digital asset regulation, AI governance, stablecoins, RWA, and digital financial infrastructure.
Corundum is committed to providing industry practitioners, investment institutions, startup teams, and policy researchers with original research content of long-term value through legal analysis, policy research, and comparative law perspectives, continuously tracking the evolution of the global digital economy regulatory system.
Understanding the Rules That Shape the Future.
Disclaimer
This article represents only the author's personal research views and is intended solely for study, exchange, and discussion. It does not constitute legal advice, investment advice, or any other professional advice. Readers should make independent judgments based on their own circumstances and consult relevant professionals when necessary.
