CRS Provides Primer on Stablecoin Yield Loophole

The Congressional Research Service ("CRS") provided an overview of the controversy over cryptocurrency exchanges paying interest on stablecoins, a practice supported by the crypto industry but criticized by the banking industry.

In the In Focus Report, the CRS explained that while stablecoin issuers are prohibited from paying interest directly to stablecoin holders, a "three-party model" allows issuers to pass interest earned on reserves to cryptocurrency exchanges, which then use those funds to pay yield to stablecoin holders.

CRS highlighted the banking industry's concern that allowing stablecoins to pay yield could cause a drain on traditional bank deposits. The banking industry asserts that if stablecoin holders substitute bank deposits for stablecoins on a large scale, it would negatively impact "the cost and supply of credit for U.S. businesses and consumers," as banks rely heavily on deposits to fund their loans.

CRS stated that the crypto industry views the banks' opposition to stablecoin yield "as anticompetitive behavior by entrenched incumbent[s]" trying to thwart a new competitor.