Will Stablecoin Rewards Survive the CLARITY Act? Section 404 Explained

This article was first published on Deythere.

As the U.S.Congress continues to deliberate on the Digital Asset Market CLARITY Act, one pressing question has remained: will stablecoin rewards regulation survive the new law? 

The CLARITY Act aims to establish a long-desired legal framework for cryptocurrency markets, spelling out who oversees what, what constitutes digital assets and where decentralized finance (DeFi) falls under federal law. 

However, one particular part of the bill, Section 404, has created controversy because it could limit or alter the ways by which users earn rewards on stablecoin balances.

Section 404: The Fine Line Between Reward and Interest

The part that draws attention on the stablecoin rewards regulation is Section 404 from the CLARITY Act draft, which focuses on how these stablecoin incentives are handled at the federal level. 

The provision says that neither a platform nor a service provider can pay “interest or yield solely in connection with the holding of a payment stablecoin.” 

This language notes the intentions of legislators to prevent stablecoin reward programs that resemble traditional bank deposit interest too closely, something banking lobbies have been pushing for by arguing that such rewards would compete with bank lending and deposits.

In short, “solely in connection with holding” means that if a user does nothing more than park a stablecoin like USDC in an exchange wallet and then earns a return on it, the reward can be seen as interest under federal law. 

That would put it with regulated bank deposits,  something many lawmakers want to avoid. 

The purpose of the proposed draft is to differentiate between basic hold rewards and any incentives. It makes room for “activity-based rewards,” attached to things like actions such as transactions, merchant acceptance, loyalty or subscription perks, providing liquidity in DeFi pools or engaging in governance activities. 

These activity-based programs could be seen in a different light from simple holding yields, providing platforms with a possible route to offer incentives without being perceived as banks. 

Why It Matters for Crypto Users and Platforms

Regulating this stablecoin rewards matters because stablecoins have moved beyond trading tools. A lot of users, especially in the U.S. earn rewards for holding stablecoins on exchanges or wallets, often in return for loyalty benefits or use of premium services. 

Leading exchanges and wallets have designed their whole retention strategies around these stablecoin incentives. For example, some customers of popular exchange Coinbase have been able to generate big returns on stablecoin balances due to rewards included in its Coinbase One premium membership offering. 

The company has also warned lawmakers that limits on such rewards, especially if those are treated like traditional deposit interest, could ruin its business models.

The language in Section 404 tries to achieve that balance. By banning interest earned simply for holding stablecoins, the bill intends to prevent stablecoin programs from resembling bank deposits. 

But by allowing rewards tied to platform or network usage, it leaves space for innovation and user engagement mechanics that don’t just mimic traditional financial products. 

This interpretation of what counts as “interest” as opposed to “activity-based” rewards is now one of the main battles in the ongoing legislative process. 

CLARITY Act Timeline and Ongoing Negotiations

The CLARITY Act, named H.R. 3633 (the Digital Asset Market Clarity Act of 2025), cleared the U.S. House of Representatives in a bipartisan vote in June 2025. 

Its purpose is to clear up how digital assets are classified and which federal regulator has jurisdiction. The Commodity Futures Trading Commission (CFTC) would have jurisdiction of digital commodities and their market intermediaries under the bill, while anti-fraud and securities authority would be retained by the Securities and Exchange Commission (SEC).

The Senate has been weighing its own version of the bill since January 2026, but progress has been uneven. 

The Senate Banking Committee put its markup session on hold following industry pushback, particularly over the stablecoin regulations and DeFi oversight. 

A similar effort in the Senate Agriculture Committee also postponed its markup to get bipartisan support. These delays are because of the difficulty in merging contrasting visions of regulation, innovation and consumer protection. 

Industry reactions spell out the tension. Coinbase had cautioned that it might withdraw its support for the bill should a restriction on stablecoin rewards not be more clearly defined so as to still allow consumer programs. There are also questions about the influence of bank lobbying on the stablecoin provisions, though many still support federal clarity around digital asset markets.

How Section 404 Might Look Like If it Works

If the finalized version of the CLARITY Act includes the current Section 404 language, U.S. regulation on stablecoin returns would likely differentiate between straightforward deposit-style interest and more complicated incentive programs. The purest interpretation would be that:

Automatic rewards might not be allowed when holding a stablecoin if it looks like earning interest on bank deposits under federal law.

Rewards tied to transactions, active engagement (such as loyalty programs or merchant usage), liquidity provision, validation, or governance participation may still be permissible so long as the transactions must be engaging a network, and cannot be easily construed as being solely for holding value. 

The so-called issuer firewall which is the clause that specifies that stablecoin issuers are not automatically considered to be paying any kind of interest rate simply because some third party offers rewards, is intended to give token issuers a buffer, as long as they’re “not directing the program.” 

That means if an issuer wants to avoid being treated as an interest-paying entity, it should not retain formal control over reward design or distribution. 

How to define “directs the program,” however, is expected to be another issue in legislative negotiation and subsequent rule-making. 

Conclusion

The fight over the regulation of stablecoin rewards under the CLARITY Act reveals a divergence in U.S. crypto policy. 

Section 404 opens the difficult policy questions around creating a legal framework that allows strict consumer and financial stability protections, even as it provides space for innovation and consumer incentives seen so much on digital asset platforms.

Lawmakers are struggling with a simple question: when does a reward look like interest tied to a deposit, and when is it a legitimate incentive tied to user activity?

How this question is resolved in law will determine how platforms design stablecoin products, how users respond to incentives, and how the U.S. positions itself globally for digital finance. 

As the delays and negotiations extend, the final language around these stablecoin rewards could emerge as late as mid-2026.

Glossary

Stablecoin rewards regulation: the law that dictates when and how a platform can pay dividends; yield, or returns related to holding or transacting stablecoins.

Stablecoin: a cryptocurrency pegged to the value of a stable asset, such as the US dollar, which is frequently used for payments and trading, as well as a store of value.

Section 404: a provision in the CLARITY Act’s draft that would also prohibit platforms from paying interest or yield for simply holding a payment stablecoin.

CLARITY Act: stands for the Digital Asset Market Clarity Act, which is a bipartisan bill that seeks to bring clarity to crypto regulations in the U.S., such as which agency has oversight over different forms of digital assets.

Activity-based rewards: Rewards that are tied to activities (like transactions, loyalty schemes or using DeFi mechanisms), not just holding.

Frequently Asked Questions About Stablecoin Rewards Regulation

What is the CLARITY Act?

The U.S. legislation aimed at providing a clear federal framework for regulating digital assets; including how stablecoins or commodities should be classified and which regulators have authority. 

Why is Section 404 controversial?

Section 404 is contentious in that it would restrict how platforms can offer incentives for holding stablecoins, including what are considered straight yield offers and activity-based rewards. Critics say this could potentially affect the user reward programs that already exist.

Will there be a full ban on stablecoin yield?

Not necessarily. The draft centers on stemming rewards for holding stablecoins but permits incentives associated with other actions, such as transactions or engagement mechanics. 

What happens next in Congress?

Senate committees have postponed markups to refine the bill and cultivate bipartisan support. The final language on stablecoin rewards and DeFi oversight should come through negotiations and amendments. 

References

CryptoSlate
CoinGeek
CryptoRank
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