Author: Jae, PANews

Many compliance obstacles have emerged on the path of USDC holding interest.

The profit logic of the stablecoin market is undergoing a restructuring from "earning money passively" to "earning through labor".

The Clarity Act is cutting off passive income streams for CEXs (centralized exchanges), but it preserves space for activity rewards for DeFi-native stablecoins. According to the draft text disclosed in March, if the bill passes, it could mean the end of days when users could earn 4% annualized returns by holding USDC on Coinbase.

The era of centralized stablecoins' old-world advantages may be coming to an end, but DeFi-native stablecoins such as USDe and USDS have the opportunity to find room for growth in regulatory gaps and usher in a chance for further expansion.

Banks spend $56.7 million lobbying to block "on-chain deposits".

The Genius Act, which will take effect in July 2025, establishes rules for stablecoin issuance at the federal level for the first time, requiring a 1:1 reserve ratio and binding issuers to pay interest directly. However, it also leaves a "distributor loophole": platforms like Coinbase can return US Treasury yields to users as "rewards" through revenue sharing with issuers like Circle. This is essentially the same thing as banks not being able to directly pay users deposit interest, but being able to give users "red envelopes" through third parties.

Stablecoins have quietly broken through their "payment tool" positioning in this gray area, transforming into "on-chain deposits" with built-in returns.

The Clarity Act was enacted precisely to close this loophole. The latest draft text disclosed in March shows that the ban has been expanded from issuers to all "digital asset service providers," including CEXs, brokers, and their affiliates.

This trend of restrictions reflects regulators' concerns about the conflict between the "monetary attributes" and "securities attributes" of stablecoins. In the regulatory consensus, payment-type stablecoins are considered a "narrow bank" tool: their function is positioned for payments and settlements, rather than as investment products for capital appreciation.

The Clarity Act's stringent restrictions on profit distribution are part of a carefully orchestrated defensive battle by the American banking industry. The ABA (American Bankers Association) spent a staggering $56.7 million lobbying efforts to prevent stablecoins from offering competitive returns.

The banking industry believes that if users can obtain a 4%-5% yield similar to government bonds by holding stablecoins, and are not subject to traditional banking regulation and deposit insurance, then up to $1.5 trillion in low-cost retail deposits will flow out of the commercial banking system.

This "deposit flight" phenomenon is particularly devastating to U.S. community banks, which rely heavily on retail deposits to support loans to farms, small and medium-sized enterprises, and mortgaged homes.

Standard Chartered estimates suggest that if stablecoin yields are not banned, the banking system could face a $500 billion funding gap by 2028.

However, PANews believes that this calculation is based on several assumptions, and the speed and scale of deposit migration will be affected by multiple factors such as user habits, platform security, and regulatory transparency.

The overlap between stablecoin users and bank retail deposit users is relatively limited. The estimate of $1.5 trillion in deposit outflow is based on extreme assumptions, and the actual impact is likely to be far lower than that.

Furthermore, stablecoins and bank deposits differ fundamentally in terms of risk attributes and use cases, and the two are not necessarily complete substitutes.

Passive income is doomed; activity rewards leave a narrow entry point.

The Clarity Act does not ban all rewards outright. Instead, it circumvents the "expected profit" criterion in the Howey Test by setting an "identifiable activity" screening standard.

The Clarity Act explicitly prohibits interest payments based on "idle balances," which has severely impacted the revenue-sharing model between Coinbase and Circle that has lasted for several years. For a long time, Coinbase has offered USDC holders rewards of up to 3.5%-5%, with the funds sourced from the interest income from Circle's holdings of US Treasury bonds.

Data shows that USDC rewards are correlated with the 3-month US Treasury yield by as much as 98.7%. By severing this link, regulators are effectively depriving CEXs of their most attractive weapon for user growth.

In contrast, the Clarity Act preserves the incentive legitimacy for "proactive actions." Under Section 404(b)(2) of the Act, rewards generated from three categories of activities are considered compliant:

Platform activities: loyalty programs, promotional raffles, subscription discounts, etc.
Transactions and consumption: Payments, transfers, and cross-border remittances settled using stablecoins;
On-chain infrastructure contributions: participating in protocol verification, staking, governance voting, or providing liquidity.

This classification creates a new legal logic: if the income is not "given away for free," but is obtained by the user in exchange for taking on specific risks or performing specific labor, then it is no longer a "deposit," but a "payment for service."

Strictly speaking, the path to earning interest with USDC is not completely blocked; users can still earn rewards by investing USDC and participating in activities. However, since participating in these activities involves certain costs, the returns will inevitably be reduced compared to the previous "passive income" model. The utility of USDC will increasingly focus on payments, settlements, and consumption.

This has created a clear compliance path and growth opportunities for DeFi native stablecoins.

Derivatives hedging and protocol profit sharing: DeFi's native stablecoins have found a compliance "escape route."

While CEXs struggle to navigate the "regulatory minefield," DeFi native stablecoins like USDe and USDS, with their drastically different yield logic, have found loopholes in regulatory compliance.

Taking USDe as an example, it abandons bank dollar reserves and is supported by a derivative structure of "synthetic dollar", with the underlying logic being Delta-neutral hedging.

USDe's revenue comes from two separate activities, both of which can be interpreted as "activity-based rewards" under the Clarity Act:

Staking Yield: Earning consensus layer rewards on the Ethereum network by holding staking tokens such as stETH. This is explicitly listed in the legislation as a compliant activity of "participating in validation or staking".
Funding Rates (Derivatives Layer): These are generated by opening an equivalent short position in a perpetual contract on the trading platform. In a bullish market, the funding fees paid by long positions to short positions constitute the main source of USDe's revenue.

Under the Clear Act, the returns earned by USDe holders are essentially rewards for participating in a specific activity of "risk management and hedging," rather than interest paid by the protocol based on the deposit balance.

Because USDe's returns are volatile and it carries counterparty risk and smart contract risk, it will legally fall outside the scope of "bank deposit equivalent".

USDS signifies another DeFi native force adapting to regulation.

Users deposit USDS into the Sky protocol, and Sky deploys the deposits to other lending protocols or liquidity pools. During this process, revenue or fees generated on Sky, as well as RWA (Real-World Asset) yields, are distributed to users as rewards.

Therefore, USDS incentivizes users through "protocol revenue sharing" rather than "interest payments." Furthermore, the provisions in the draft Clarity Act regarding rewards for "providing liquidity" provide legal protection for DeFi protocols adopting a similar model to USDS.

The advancement of the Clarity Act signals the impending end of the era of unchecked growth for stablecoins. Under the scrutiny of regulation, the market is moving towards a clear dual-track structure, where there are no absolute winners, only survivors who adapt to the rules.

Centralized stablecoins such as USDC will inevitably become "tool-like," returning to their original purpose of payment and settlement. With their compliance, liquidity, ecosystem coverage, and cross-border transfer experience, they will become the preferred digital cash for most ordinary users and businesses, and returns will no longer be their competitive barrier.

DeFi native stablecoins such as USDe may take over wealth management needs and become the "yield engine" of the crypto market. By deeply anchoring asset value to complex on-chain activities such as Delta-neutral hedging and liquidity mining, they cleverly circumvent regulatory scrutiny targeting "bank deposits".

The differentiation within the stablecoin sector is an inevitable result of the market seeking the optimal solution within a compliant framework. For investors, understanding the underlying logic of this shift is more important than chasing high returns: future stablecoin yields will no longer belong to passive "holders," but to "contributors" who actively participate in protocol activities.

This shift is both a result of regulatory constraints and an opportunity for DeFi innovation to adapt to regulation.

The U.S. Senate Banking Committee plans to release a draft revision of market structure legislation as early as today.

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