Licensing process is key to yield in OCC stablecoin rule

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• Key insight: The Office of the Comptroller of the Currency will assess stablecoin rewards programs on a case-by-case basis, leaving uncertainty over which arrangements comply with the GENIUS Act's ban on interest payments.
• Forward look: If the OCC rejects an issuer's rewards program, it could spur litigation, and a future administration could take a different view of which arrangements violate the law, making even approved arrangements potentially less durable.

The Office of the Comptroller of the Currency's final stablecoin rule leaves significant uncertainty around the extent to which issuers and their affiliates can pay customers returns on their assets without violating the GENIUS Act's ban on paying interest.

In a final rule issued Wednesday, the agency removed a rebuttable presumption against stablecoin yield initially included in the proposed rule issued in March. 

Pursuant to the law, OCC's regulation maintains a narrow ban on direct yield payments from issuers to customers. OCC says it will evaluate alternative yield arrangements on an individual basis and declined to include a list of possible legal arrangements. At the same time, banks have opposed the ambiguous status quo as allowing workarounds to the ban. Issuers will need to get additional clarity from the agency, says Roman Goldstein, a partner at the Klaros Group, a fintech consultancy. 

"The OCC basically punted the yield question to the licensing and supervisory process," Goldstein said, adding that the agency rebuffed industry requests, voiced in public comments to the proposal, to provide explicit legal safe harbors. "If you're an issuer, you're going to present your program to the OCC as part of your application to issue stablecoins, and if the OCC doesn't like what it sees, it's going to tell you.

"If you don't revise your program, the OCC might deny you a license to issue stablecoins altogether," he continued. 

The final rule comes amid an ongoing debate between banks and the crypto industry over what the GENIUS Act's prohibition on yield actually means. The law explicitly bans interest payments "solely in connection with the holding, use, or retention" of stablecoins. Stever Gannon, a partner at Davis Wright Tremaine, says certain arrangements — like rewards arrangements used by credit card issuers — could wind up passing muster.

"We won't know until the applications actually get processed, but I think what we can say is some pretty plain activity-based uses of stablecoins that wind up paying yields [like] merchant discounts may be permissible," Gannon said. "Other things that should be permissible and I have a fairly high degree of confidence in this, is depositing of stablecoin pairs into liquidity pools … or depositing them into crypto lending protocols.

"Those are clearly activities that the stablecoins are put to work," he continued. "They're not obviously being held idly and they should pass muster pretty easily."

What's less clear, Gannon said, is what constitutes an indirect payment tied to productive activity of a stablecoin, and whether that definition is wide enough to create a loophole for rewards on idle stablecoins.

Gannon says he understands the agency's move to remove the presumption against yield arrangements, given there are so many possible ways to structure a rewards program. He says they have ample enforcement tools — including civil money penalties, prohibitions and prompt corrective actions — to ensure issuers stay within the boundaries they set for the stablecoin space. 

Banking trade groups like the American Bankers Association, on the other hand, have sharply criticized the decision to drop the proposed rule's presumption against yield arrangements, saying the resulting wiggle room will likely be filled by yield workarounds Congress didn't want when it wrote the law. 

"The final rule removes the OCC's originally proposed safeguards that would have addressed indirect arrangements involving affiliates, exchanges and other distribution partners," ABA President Rob Nichols said in a statement this week. "As a result, payment stablecoin issuers can provide economically equivalent yield while technically avoiding the statutory prohibition. The OCC also declined to adopt a broader presumption against arrangements designed to circumvent the ban.

"While we appreciate the OCC's recognition that additional supervisory experience may inform future action in this area, attempting to address deposit flight and economic harm after it has occurred is the wrong approach," Nichols continued. 

Advocates for small banks, including the Independent Community Bankers of America, have expressed concern about how payments stablecoins can eat into community bank lending, with financial stability effects. 

Whether stablecoins draw deposits will likely depend on the breadth and depth of customer adoption. Experts have argued that even with enticing rewards, it's not clear stablecoins will ever represent a meaningful challenge to deposits in the near term. 

Gannon argued that deposit fears could be overstated, pointing to recent FDIC data that shows community banks' deposit bases have grown in recent years, just as stablecoins have been on the rise. 

"You can debate the data eight different ways from Sunday, but those data points, which are neutral, seem to say so far community banks are doing okay," he argued. "But things could turn around." 

In the near term, litigation seems likely, says Jaret Seiberg, a financial services analyst at TD Cowen. 

"We view this rule as negative for banks as it does not fully shut down the ability of platforms to pay yield on stablecoins," he wrote in a note this week. "It reinforces our view that the Supreme Court will need to decide if the payment of rewards or yield by platforms on stable coins violates the GENIUS Act."

The legal battle could spawn if the agency takes an enforcement action against an issuer in the licensing process, says Seiberg. 

"We expect the OCC will take an enforcement action against some yield arrangement once it starts approving payment stable coin issuers," he wrote. "That issuer will then challenge the enforcement action, which will shift this fight to the court."

Goldstein says a lawsuit would require "final action" by the agency, rather than an absence of enforcement. An issuer whose application is denied for its rewards program could have standing — or a future administration could also change course.

"You can never rely on non enforcement," he said. "The OCC decides to not enforce the statute today, then the later administration can take a different position…you might be in a case where you're litigating against the future administration over what the yield prohibition means."

Issuers would be best served if they can work with the agency to get approval for their program, which could strengthen their defense against a future legal challenge if the White House changes parties. 

"The best thing issuers can do is get the OCC to approve the program they want to offer," Goldstein said. "That way, a future administration can come in and challenge it. But issuers have a pretty good defense: the agency let me do this for two years, three years."