U.S. Moves Toward Stablecoin “Interest Ban,” Raising Prospect of Market Restructuring

Shift toward defining stablecoins as distinct payment instruments separate from banks
Competition intensifies around transaction speed and fee structures
Market may reorganize around specialized use cases

As U.S. policymakers converge on a compromise to restrict interest payments on stablecoins, legislative discussions are regaining momentum. The core of the debate centers on prohibiting returns from simple holdings while allowing limited rewards tied to transactions or specific activities. After months of stalled negotiations, renewed progress signals a clearer stance in Washington on how stablecoins should be classified. With weakening demand increasingly seen as inevitable, industry players are pivoting toward strategies focused on faster payments and lower fees rather than yield.

“Should Not Function as Yield-Bearing Assets”

According to blockchain-focused outlet CoinDesk on March 24, the U.S. Senate and the White House recently reached a preliminary agreement to ban interest on passive stablecoin holdings while permitting certain activity-based incentives. The compromise on one of the most contentious issues in crypto regulation has reopened discussions on the Digital Asset Market Structure bill (the CLARITY Act), which had remained in gridlock since January.

The issue has long divided crypto exchanges such as Coinbase and stablecoin issuers like Circle from major banks including JPMorgan and Bank of America. The crypto industry has argued that allowing rewards or incentives is essential to maintaining user adoption and platform competitiveness. Banks, however, have pushed for a full ban, warning that yield-bearing stablecoins could draw deposits away from the traditional financial system. Lawmakers ultimately settled on blocking passive yield while allowing limited activity-based rewards.

The compromise reflects concerns about deposit outflows while partially accommodating industry demands. However, signs suggest that stricter rules may emerge in the legislative phase. CoinDesk, citing anonymous sources, reported that draft language under discussion would prohibit reward structures based on simple account balances, effectively extending restrictions beyond interest to all balance-based incentives. This would broadly constrain models that position stablecoins as yield-generating assets.

Senators Angela Alsobrooks and Thom Tillis, co-sponsors of the CLARITY Act, have also emphasized the need to restrict exchanges from offering rewards to stablecoin holders and to limit access to transaction volume data, making reward calculations more difficult. Markets expect the compromise to accelerate the legislative process, with the Senate Banking Committee planning to resume review as early as April. Following committee review, the bill would proceed through House and Senate votes and reconciliation before reaching the president for final approval.

Expansion of Payment Infrastructure Competition

Industry players are already preparing for the next phase under a more conservative outlook. Cody Carbone, CEO of the Digital Chamber, a leading blockchain advocacy group, signaled willingness to compromise with banks in a recent message to lawmakers. He stated that “giving up yield-based rewards represents a significant concession by the industry to advance the CLARITY Act,” while stressing that reward systems tied to transactions or user activity must be preserved. This clarifies a strategic shift away from passive income toward usage-based incentives.

In a framework where interest is eliminated, the incentive to hold stablecoins declines sharply. Without returns from passive ownership, user decision-making naturally shifts toward utility. Industry trends indicate a repositioning of stablecoins toward transaction and payment use cases. As processing speed and reliability in remittances and payments emerge as key competitive factors, efficiency during usage—rather than the inherent attractiveness of the asset—becomes the primary differentiator.

Fee competition is accelerating accordingly. To establish stablecoins as viable payment instruments, providers are increasingly pushing fees toward near-zero levels. This, in turn, is intensifying competition in payment infrastructure. Circle has introduced “Arc,” an open Layer-1 blockchain tailored for stablecoin finance, while Tether has invested $24 million in “Plasma,” a public Layer-1 network optimized for cross-border transfers. Tempo is also building a settlement layer focused on merchant payments, supported by incubation from Paradigm and Stripe.

Weakening Retail Demand Appears Unavoidable

Despite these efforts, expectations of demand contraction remain widespread. As noted, limiting interest payments significantly weakens the incentive for retail users to hold stablecoins. Without yield, the appeal of simple ownership diminishes, and payment and remittance functionality alone may struggle to compete with existing financial systems. In this context, stablecoins are more likely to function as specialized intermediaries rather than as financial products competing with bank deposits.

Usage patterns already indicate where demand is likely to persist. Tether CEO Paolo Ardoino pointed to developing economies experiencing rapid currency depreciation, citing Argentina and Turkey as examples where dollar-based stablecoins serve as a “lifeline.” He noted that roughly 3 billion people globally live in countries with severe inflation and added that “in places like Bolivia, it is not an exaggeration to say that nearly everyone uses Tether.”

Some analysts also view stablecoins as attractive alternatives for cross-border payments and corporate transactions due to cost and time savings. However, such demand largely arises in environments with limited access to traditional financial services. In stable monetary systems, the same level of necessity may not materialize. Ardoino himself cautioned that “it is premature to say cash will disappear,” adding that stablecoins should be viewed as one option among many for the foreseeable future.