The Stablecoin Yield Debate: What CFIs Need to Know

In the US, average corn yields have increased from around 30 bushels per acre in the 1930s to nearly 180 bushels per acre in recent decades, a transformation driven by advances in seeds, technology, and farming practices. The concept of yield has always been about getting more value from an existing asset whether that asset is land, capital or, increasingly, digital money. 

As Congress moves closer to finalizing the CLARITY Act (proposed legislation designed to create a clearer regulatory framework for digital assets, cryptocurrencies and blockchain-based financial products) one of the most closely watched provisions is about yield. At the center of the debate is Section 404, which addresses whether stablecoin issuers and crypto platforms should be able to offer interest- or yield-like rewards on stablecoin balances. The outcome could shape how digital dollars compete with traditional bank deposits and determine whether stablecoins become simply a new payments tool or a broader alternative to bank accounts.

For community financial institutions (CFIs), the issue is significant. If stablecoin providers are able to offer rewards that resemble interest, CFIs could face a new source of competition for low-cost deposits.

“Section 404 underscores why the design of any stablecoin reward program matters as much as its label," said Sheila Noll, executive vice president, chief operating officer at PCBB. "A clear distinction between incentives connected to genuine payment or platform activity and returns based solely on holding a balance would provide community financial institutions with a more defined framework for evaluating deposit, payments, and customer-relationship implications as the market develops—while ideally helping to preserve the traditional, safe, and trusted deposit and savings services customers and local communities rely on.”

As stablecoins gain traction as a potential payment tool, promising faster settlement and greater efficiency, the debate over yield centers on a key question: what happens if stablecoins begin to compete more directly with traditional savings products?

Crypto companies argue that users should be able to earn rewards on stablecoin balances, particularly where those rewards come from broader ecosystem activity — providing liquidity for market making, posting collateral for trading, and staking related activity — rather than simply holding the asset. In their view, limiting rewards could restrict innovation and prevent digital asset markets from developing competitive consumer products.

Banking groups, however, warn that the distinction between a “reward” and interest could become blurred. They argue that if stablecoin issuers or platforms can offer returns on balances, they could create deposit-like products outside the traditional banking framework without the same regulatory requirements, consumer protections, or connection to community lending.

That concern remained unresolved in July, when a coalition of six banking trade groups, including the ICBA and ABA, said revisions to the CLARITY Act still did not adequately address the potential for stablecoin yield products. The groups called for additional changes to close what they described as a stablecoin-yield loophole, while continuing negotiations with lawmakers.

It should be noted that while CFIs share concerns that yield-bearing stablecoins could create new competition for deposits, the industry is not entirely uniform in its view of Section 404. Some institutions support stronger restrictions to ensure stablecoins don’t become deposit-like products outside the regulated banking system, while others are more focused on ensuring banks can participate in the evolving digital asset ecosystem. For these institutions, the priority is ensuring that any regulatory framework creates a level playing field and allows financial institutions to explore new payment and settlement opportunities. 

While the final outcome of Section 404 remains important, CFIs do not need to wait for legislation to see where the market is heading. Here are some steps institutions can take to protect their deposits.

1. Monitor customer behavior. Understanding how customers use digital wallets, stablecoins, and alternative payment platforms will help identify emerging opportunities and risks.

2. Strengthen digital payment capabilities. Customers increasingly expect faster, more flexible payments. CFIs should continue evaluating partnerships and infrastructure investments that improve payment experiences.

3. Engage with emerging technologies. As stablecoins and tokenized assets become part of the broader financial ecosystem, developing internal knowledge now will be key in making better decisions later.

4. Maintain the deposit relationship. CFIs inherently have the strongest defense against new forms of competition: trusted advice, local relationships, and access to credit.

Regardless of the final language in the CLARITY Act, the broader trend is clear: money is becoming increasingly digital. Stablecoins, tokenized deposits and blockchain-based payment systems are all part of a wider shift toward programmable financial infrastructure. For CFIs, the rise of stablecoins does not have to represent a threat alone. It can also be an opportunity to rethink payments, explore new technology, and reinforce the role CFIs play in a rapidly changing financial system. The institutions that begin preparing now will be better positioned as digital assets move from the margins of finance into everyday transactions.