Why new stablecoin rules could reshape how crypto holders earn rewards
A New Chapter in Crypto Regulation
Stablecoins have become a cornerstone of the cryptocurrency ecosystem. These digital assets are designed to maintain a stable value by being backed one-for-one with traditional assets like the US dollar, making them a convenient medium for trading, payments, and DeFi applications. But as more people hold and use stablecoins, lawmakers are asking hard questions about how these assets are treated under financial rules. One of the most significant recent developments is that the Stablecoin Rewards Clarity Act, part of the broader Digital Asset Market Clarity Act (CLARITY Act), has introduced major changes in how stablecoin rewards are regulated in the United States.
The CLARITY Act is a proposed federal law aimed at providing clearer rules for digital assets, defining how regulators like the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) oversee different kinds of crypto assets. Stablecoins are carved out as a specific category of “permitted payment stablecoins,” and Section 404 of the CLARITY Act focuses on how platforms can or cannot offer rewards tied to those stablecoins.
Section 404 might sound technical, but it has enormous implications for everyday crypto users and platforms alike. At its core, it seeks to distinguish between rewards that look like interest or deposit returns and rewards tied to actual activity in the network or platform. This distinction aims to balance consumer protection with innovation, and to prevent stablecoins from becoming a regulatory backdoor around banking laws.
What Stablecoin Rewards Have Looked Like So Far
To understand the impact of Section 404, it helps to know what stablecoin rewards are today. Many centralized exchanges and wallets offer incentives to users who hold stablecoins in their accounts. For example, users might earn a quoted annual percentage yield simply by leaving their stablecoins on the platform’s balance page. In the crypto world, such rewards are marketed as a way to make your stablecoins more productive while you wait for better opportunities.
To lawmakers, however, this kind of passive return looks a lot like interest on a deposit the kind of income banks pay consumers for holding money in a savings account. Stablecoins, unlike bank deposits, are not backed by the Federal Deposit Insurance Corporation (FDIC), and they fall outside traditional banking regulations. This has raised concerns among regulators and banking lobbyists that crypto platforms are offering deposit-like products without the same protections or supervision.
This debate over rewards has already played out in recent years. The GENIUS Act, passed in 2025, requires stablecoins to be backed fully by reliable assets and prohibits stablecoin issuers from paying direct interest to holders. But a loophole remained: some exchanges continued to offer stablecoin rewards that were functionally similar to interest but framed as third-party incentives. This has fueled a broader push for clearer legislation like the CLARITY Act.
Section 404 in Plain English
So what exactly does Section 404 say? In simple terms, it draws a line between passive interest like rewards and activity based rewards. The key rule is that a digital asset service provider such as a crypto exchange or wallet provider cannot pay any form of interest or yield solely for holding a payment stablecoin. If a user earns rewards just because they keep stablecoins in their account with no additional activity, that is considered too close to traditional deposit interest and is prohibited under Section 404.
The phrase “solely in connection with the holding” is central here. It means that if the only reason a user gets value is from holding the stablecoins, the reward could be illegal under this law. However, Section 404 tries to preserve activity based rewards and incentives. These are rewards linked to actions like:
Making transactions
Using a wallet or platform
Participating in loyalty or subscription programs
Accepting merchant payments
Providing liquidity or collateral in DeFi
Engaging in governance or validation tasks
By allowing rewards tied to activity instead of passive holding, regulators hope to encourage engagement and productive uses of stablecoins while discouraging products that mimic bank deposits. This creates a new environment for product design in the crypto sector.
What Crypto Users and Platforms Should Expect
For crypto users, Section 404 may change how they earn rewards on their stablecoin balances. Products that simply offer a percentage yield for holding stablecoins will either need to be restructured or replaced with programs that require some form of user activity. This could mean:
Cashback or points when stablecoins are spent with merchants
Rewards for active wallet use or frequent transactions
Incentives for participation in liquidity pools or governance
Bonuses for staking or other ecosystem contributions
These changes could make the stablecoin rewards landscape feel more like spending and engagement programs in traditional finance, rather than passive savings accounts offering interest. Users who prefer passive earning may find fewer options or need to seek activity based alternatives.
For platforms, Section 404 demands careful product design and clear disclosures. Marketing materials must not imply that stablecoin balances are like FDIC insured bank deposits or that rewards are risk free. Platforms will need to explain who is funding rewards, what actions users must take to qualify, and what risks are involved. This increased transparency could benefit users but also adds compliance complexity for companies.
Platforms that want to continue offering competitive incentives may embrace loyalty style rewards or commerce related programs that tie rewards to real user behaviors rather than simply holding assets. This shifts stablecoin products toward experiential and transactional models instead of passive income models.
The Broader Debate: Banking vs Crypto
The fight over stablecoin rewards isn’t happening in isolation. It reflects a broader tension between the traditional banking sector and the crypto industry. Banks have argued that stablecoin yields represent a regulatory loophole that could siphon deposits away from insured banks, potentially undermining the traditional financial system. Proponents of tougher limits worry that unregulated yield products could expose consumers to risk and destabilize credit markets if large amounts of funds move into crypto platforms.
On the other side, crypto advocates argue that rewards and yield products are an important competitive tool that fosters innovation. They say that by allowing platforms to offer incentives for activity and engagement, stablecoins can provide better user experiences while creating new economic models within decentralized finance. Some industry voices warn that overly restrictive rules may stifle innovation and make the US less attractive as a hub for crypto development.
The CLARITY Act’s Section 404 is one of the first formal attempts to mediate this debate through legislation, shaping how stablecoin rewards fit into a regulated financial ecosystem. Whether this approach achieves the desired balance between protection and innovation remains to be seen as lawmakers continue negotiating details.
Section 404’s Role in Future Crypto Regulation
Section 404 is part of a larger movement toward clearer and more comprehensive crypto regulation in the United States. The broader CLARITY Act aims to allocate regulatory authority more precisely between agencies like the CFTC and SEC, define categories like stablecoins and digital commodities, and establish fundamental compliance frameworks for digital asset markets. This framework attempts to settle long-standing questions about how crypto assets fit into existing securities, commodities, and banking laws.
By focusing on stablecoin rewards, Section 404 tackles one of the most consumer-facing issues in crypto today. It draws a clear line between passive passive interest-like returns and active, participation driven incentives. This distinction could influence how crypto products are marketed and used in the future, pushing the ecosystem toward more transparent and activity driven reward structures.
Thoughts
The Stablecoin Rewards Clarity Act and Section 404 represent a major step forward in how stablecoin related incentives are regulated in the United States. By barring passive yield based on holding alone and allowing activity driven rewards, lawmakers are trying to balance consumer protection with innovation. For users, this means a shift away from simple passive earning toward active involvement with stablecoin ecosystems. For platforms, it demands careful compliance and clear communication with users. Most importantly, Section 404 highlights how stablecoins are now not just a crypto innovation but an integral part of the wider financial regulatory landscape.
