CLARITY Act Stablecoin Yield: What Section 404 Bans

The CLARITY Act's stablecoin yield rule, Section 404, would stop crypto platforms paying interest-like rewards simply for holding a stablecoin, while still allowing rewards for activity such as payments, providing liquidity, posting collateral, staking or governance. It is the compromise Senators Thom Tillis and Angela Alsobrooks released on 1 May 2026. Because the CLARITY Act failed a Senate cloture vote on 15 September 2026, Section 404 is not law as of 2 October 2026, and platform stablecoin rewards remain legal in the US for now.

This guide focuses on that one question: what the yield text says, why banks fought it, and what it would mean for stablecoin yield in DeFi. For the bill as a whole, including the SEC/CFTC split and the Senate timeline, read the CLARITY Act explained.

Why stablecoin yield became the sticking point

The GENIUS Act, the US stablecoin law signed in July 2025, already bars stablecoin issuers from paying holders "any form of interest or yield" solely for holding, using or retaining a payment stablecoin (Section 4(a)(11), as quoted by Astraea Law). It says nothing direct about third parties, such as exchanges, that hold stablecoins for customers.

That gap is how platform rewards work. An issuer earns interest on the Treasury bills and cash behind its coin, shares part of it with a distribution partner, and the partner passes some on to users as "rewards". Circle averaged $76.5 billion of USDC in circulation in Q2 2026 and earned $668 million of reserve income, while Coinbase made $292 million from stablecoins, about a quarter of its revenue, according to 24/7 Wall St.

Banks call this a loophole. If a dollar stablecoin pays a reward close to a savings rate, customers might move money out of bank deposits, which banks lend out. Crypto firms say rewards are a normal part of competing for users. The CLARITY Act was the first real attempt to draw the line.

What Section 404 says

Based on the reported Senate Banking text, as summarised by Astraea Law and CoinDesk:

• Who it covers. A "digital asset service provider" and all its affiliates. Permitted stablecoin issuers and registered foreign issuers are excluded, because the GENIUS Act already bars them from paying interest.
• Prong one. No interest or yield paid to a US customer "solely in connection with the holding" of payment stablecoins.
• Prong two. No compensation paid "in a manner that is economically or functionally equivalent" to interest on an interest-bearing bank deposit.
• What survives. "Incentives based on bona fide activities or bona fide transactions".
• Rulemaking. Regulators would have one year after enactment to write the rules, including a non-exhaustive list of permitted activities.
• Disclosure. Plain-English disclosure of who pays the reward and on what terms, and a statement that stablecoins are not deposits and are not insured.

Two details surprise most readers. First, permitted rewards "may be calculated by reference to a balance, duration, tenure, or any combination". So a reward can still scale with how much you hold, provided it is tied to a genuine activity. Second, the text includes a good-faith safe harbor for firms relying on the rules.

Idle balances vs activity: where the line falls

The list of activities regulators would have to publish includes, according to Astraea Law:

• payments, transfers, conversions, remittances and settlement;
• providing liquidity for market-making and posting collateral;
• participation in governance, validation or staking;
• loyalty, promotional, subscription or incentive programmes.

The table reflects the reported text, not final rules. The "economically or functionally equivalent" test is a judgement call. A programme that is formally tied to activity, but in practice pays everyone a steady rate on their balance, could still fail it. That is why both sides cared so much about who writes the rules and how.

The bank lobby's position

Banking groups opposed the compromise from the start, and the gap never closed:

• On 13 July 2026 the American Bankers Association, the Independent Community Bankers of America (ICBA) and 76 state associations asked senators to replace the "functional and economic equivalent" standard with "substantially similar", and to remove language allowing rewards tied to balances (ICBA).
• ICBA's chief executive, Rebeca Romero Rainey, said: "For us, this loophole has to be closed entirely. There's not a middle ground in terms of resolution." ICBA estimates that $1.3 trillion of deposits could move into stablecoins over time, cutting local lending by $850 billion. Those are industry projections, and the article does not give a method (Banking Dive, 27 August 2026).
• The revised text released on 14 September added a Treasury "circuit breaker". For 18 months after enactment, Treasury could act if moves into stablecoins caused a "substantial detrimental impact" on deposits at community banks with less than $10 billion in assets. Eight banking groups, including the ABA, the Bank Policy Institute and ICBA, replied that a circuit breaker "that activates only after substantial deposit flight has already occurred is not a safeguard at all" (CoinDesk).

The crypto industry largely backed the May text. Coinbase's chief legal officer, Paul Grewal, said it "preserves activity-based rewards tied to real participation on crypto platforms" (CoinDesk).

Where the yield rule stands now

Section 404 lives inside the CLARITY Act, so it shares the bill's fate. The Senate voted 49–50 on 15 September 2026 against cloture on the motion to proceed, short of the 60 votes needed. Ethics provisions were the main reason, with the stablecoin yield dispute unresolved in the background (FinTech Weekly). A motion to reconsider keeps the bill available, but the window for 2026 is narrow.

What that means in practice, as of 2 October 2026:

• No federal law bans US exchanges from paying rewards on stablecoin balances. Issuers themselves still can't pay interest once the GENIUS Act takes effect.
• The idle-vs-activity line is the most developed compromise on the table. Any future market structure bill will probably start from it, or from a stricter version if banks gain ground.
• Regulators could still shape the question through GENIUS Act rulemaking, which is under way at Treasury, the OCC and other agencies.

What it would mean for DeFi stablecoin yield

Most DeFi stablecoin yield already comes from activity rather than idle holding. You earn because you are doing something with the coin:

• Liquidity provision. Fees and incentives from supplying stablecoins to a DEX pool, which is market-making liquidity.
• Lending. Interest paid by borrowers. Collateral posting is also on the permitted list.
• Staking and governance. Both on the permitted list.
• Yield-bearing tokens. These are a different case again. Our guide to yield-generating stablecoins explains why many are not "payment stablecoins" at all.

Two caveats. First, Section 404 binds "digital asset service providers". Whether a particular non-custodial protocol, front end or developer counts as one would depend on the bill's definitions and on rulemaking, and the reported text doesn't settle that. Second, the money that flows into DeFi often starts on a centralised exchange, and those exchanges are clearly covered. Tighter rules on idle-balance rewards at exchanges could push yield-seeking users towards on-chain activity, or towards rewards designed around activity.

Whatever the law says, activity-based yield is not risk-free. LP positions carry impermanent loss and smart-contract risk, lending carries liquidation and bad-debt risk, and stablecoins can depeg. See how to earn yield on stablecoins and stablecoin depegs explained.

Where JewelSwap fits

JewelSwap is a non-custodial protocol on MultiversX, Sui and Radix. Its stablecoin yield on Sui comes from activity: farms that use Scallop lending and Cetus liquidity, where returns come from borrowing, supplying and liquidity incentives rather than from a rate paid on idle balances. Returns are variable and carry the risks above. The stablecoin yield farming guide explains how this kind of strategy works.

Frequently asked questions

Does the CLARITY Act ban stablecoin yield?

Section 404 would ban crypto platforms from paying interest or yield solely for holding a payment stablecoin, or anything economically equivalent to bank deposit interest. It would allow rewards tied to genuine activity. The bill has not passed, so the ban is not in force as of 2 October 2026.

What is the Tillis–Alsobrooks compromise?

It is the stablecoin rewards text Senators Thom Tillis and Angela Alsobrooks released on 1 May 2026. It bans passive, deposit-like yield on stablecoin balances while preserving activity-based rewards such as payments, liquidity provision, collateral, staking and governance.

Are stablecoin rewards still legal in the US?

Yes, for crypto platforms. No federal law currently bans an exchange from paying rewards on stablecoin balances. Under the GENIUS Act, which takes effect no later than 18 January 2027, stablecoin issuers themselves can't pay interest to holders.

Why do banks oppose stablecoin rewards?

Banks argue that interest-like rewards could draw deposits out of banks and reduce lending. ICBA estimates $1.3 trillion of deposits could move over time. Banking groups asked senators to tighten the text and called the Treasury circuit breaker insufficient.

Would the CLARITY Act affect DeFi lending and liquidity pools?

Probably less than exchange rewards. Liquidity provision, posting collateral and staking are on the text's list of permitted activities. Whether a given non-custodial protocol counts as a covered service provider would depend on definitions and rulemaking.

Can stablecoin rewards still scale with my balance?

Under the reported text, yes, if the reward is tied to a bona fide activity. Permitted rewards may be calculated by reference to balance, duration or tenure. A reward paid only for holding would still be banned.

Keep reading

• The CLARITY Act explained: what it does and where it stands
• The GENIUS Act explained
• How to earn yield on stablecoins
• Yield-generating stablecoins explained
• Stablecoin yield farming
• JewelSwap crypto glossary

This article is educational and isn't legal or financial advice. Bill text and status are as of 2 October 2026 and are based on public reporting of the Senate text; final rules could differ. Sources are linked inline, including CoinDesk, Astraea Law, ICBA, Banking Dive, FinTech Weekly and 24/7 Wall St.