The Rule That Decides Whether a Stablecoin Can Pay You Anything

The Office of the Comptroller of the Currency finalised its rules for dollar pegged stablecoins this week, implementing the GENIUS Act. Issuers may not pay yield directly to the people holding their tokens. Arrangements routed through a third party will be judged case by case. The rule takes effect in January.

Circle and Coinbase each rose more than 4% on the announcement, which tells you the market read the case by case language as the important part. So did the banking industry, from the opposite direction.

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What the fight is actually over

A stablecoin issuer takes dollars, holds them in short dated Treasury bills and cash, and issues tokens redeemable one for one. At a policy rate near 4%, those reserves earn roughly 4%. The entire argument is about who gets that 4%.

Under the rule as written, not the token holder, at least not from the issuer. That restriction was the banking lobby's central demand, and the reason is a deposit base. A bank funds its loan book with deposits, many of which pay very little, and the spread between what deposits cost and what loans earn is the business. A token that is as safe as a bank deposit, moves faster and pays the bill rate would be a direct competitor for that funding.

The Independent Community Bankers of America cited analysis estimating that stablecoin adoption could reduce community bank lending by at least $850 billion in coming years, and argued the OCC should close the third party route entirely rather than review it case by case. That figure is a trade association's estimate of a hypothetical, and it should be read as advocacy. The mechanism behind it is not hypothetical at all.

Where the exception leaves things

Whitmore's Watchlist:
> CRCL (Circle Internet Group, Inc.): The largest regulated issuer, whose revenue is the interest earned on reserves.
> COIN (Coinbase Global, Inc.): A distribution platform that shares in reserve economics, which is the arrangement the case by case review covers.
> KRE (SPDR S&P Regional Banking ETF): The deposit funded side of the question, where a funding cost increase lands hardest.

The rule permits payments that are not interest and are not made solely for holding a token, which leaves a usable amount of room. A rewards programme tied to transactions rather than balances is not a yield payment under this framework, and an affiliated platform passing on economics is the fact pattern the comptroller said would be examined on its particulars.

Jonathan Gould, the comptroller, described the rule as carrying strong standards for reserve backing, redemption and risk management. That part is genuinely stabilising, and it is what distinguishes a regulated issuer from the previous generation of tokens that broke their pegs.

Two pieces are still outstanding. Bank Secrecy Act, anti money laundering and sanctions parameters are left to a separate rulemaking with the Treasury Department, and the OCC has not yet said when it will begin processing applications and waivers. Both of those determine who is allowed to issue, which is at least as consequential as what issuers may pay.

The part that reaches the Treasury market

Set aside the deposit argument for a moment and look at where the reserves go. A stablecoin backed by short dated government paper is, in balance sheet terms, a retail channel into Treasury bills.

That makes the sector a growing and fairly price insensitive buyer at the front of the curve. Bills are the part of the market the Treasury has leaned on heavily to finance recent deficits, and a buyer that purchases on issuance rather than on yield is useful to a government with a lot of short dated paper to sell. It also ties a piece of bill demand to the growth of a consumer product, which is a newer dependency than it sounds.

For a portfolio, the practical read is narrower than the headlines. This is a revenue rule for a small group of issuers and a funding question for banks that rely on low cost deposits. The regional banks carry that exposure more than the large ones, which fund themselves across wholesale markets as well. Nothing in the rule changes a deposit's insurance or a bank's capital.

Whitmore's Take: The yield ban protects bank funding and the case by case exception leaves a door open, so this is the beginning of the argument rather than the end of it. Worth watching how the first third party arrangement is treated, because that decision will matter more than the rule text.

Disclaimer
The content in this email does not constitute an offer or solicitation to buy or sell any financial instrument. All commentary is general in nature and is not directed at any individual investor.

Written by Daniel Whitmore
Millionaire Insiders