Yes, Stablecoins Should Be Permitted to Pay Interest

Stablecoin regulation has produced an important dispute over a simple question: may a stablecoin issuer share income from its backing assets with stablecoin holders? In the United States, the GENIUS Act seems to answer no: Section 4(a)(11) prohibits permitted payment stablecoin issuers from paying holders ‘any form of interest or yield’ solely in connection with holding, using, or retaining a payment stablecoin. The EU’s MiCA regime takes a similar approach for asset-referenced tokens and e-money tokens. The Bank of England’s proposal for sterling-denominated systemic stablecoins is narrower. But it still does not clearly preserve an issuer’s freedom to share reserve or backing-asset income with holders.

That prohibition looks like a prudential rule. Its immediate effect, however, is a price rule. Reserve and backing assets earn income. If the law forbids issuers from passing any of that income to holders, the income does not disappear. It is captured primarily by issuers and their shareholders, or monetized through affiliated platforms and related business lines, rather than potentially being paid directly to holders. Non-remuneration is therefore not a neutral default. It is a mandatory price term. The burden should be on regulators to show that sharing backing-asset income with holders creates a harm that cannot be addressed more directly. A categorical ban does not meet that burden.

Professor Iris H-Y Chiu’s recent OBLB post gives the strongest contrary view. She argues that stablecoins occupy a ‘third regulatory category’: they are not banks, because they do not perform balance-sheet intermediation; but they are also not ordinary investment products, because they promise stable value and redemption at par. On that view, stablecoins resemble narrow banking without a banking franchise, and issuers that want yield or remuneration should accept different regulatory consequences. That taxonomy usefully identifies the regulatory anxiety.

Professor Chiu is right that stablecoin issuers should not be allowed to blur money-like redemption promises with risky investment yield. A stablecoin should not be marketed as an insured deposit unless it is one. Nor should risky portfolio income be described as simple payment-instrument remuneration. But those are ordinary limits against misleading promises. The disagreement is about the legal default. Must remuneration push the issuer out of the payment-stablecoin category, or must the prohibition justify itself? The missing distinction is between risky yield and backing-asset income sharing. A par-redeemable payment stablecoin that transparently shares income actually generated by its backing assets, without compromising credible par redemption, does not become a bank or a mutual fund merely because it remunerates holders. It becomes a more competitive payment instrument.

Legal characterization matters, but it does not settle the remuneration question. Stablecoin issuers should clarify what they are selling. If holders bear fluctuating asset values, the product should be treated as an investment product. If holders receive a par-redemption promise, that promise should be credible. But neither proposition establishes that the issuer may never share income generated by the backing assets.

That point has a practical implication. The rationale for an interest ban must be specific to interest. It is not enough to say that stablecoins are novel, bank-like, or runnable. The ban does not by itself make an issuer’s reserves safer, its redemption promise more credible, or its balance sheet more resilient; it does not make backing assets more liquid; it does not improve disclosure; and it does not strengthen redemption rights. It simply removes one contractual term by which issuers might share backing-asset income with holders. If the real concerns are asset opacity, redemption delays, affiliate transactions, or misleading marketing, regulation should address those risks directly. The additional claim needed to justify a categorical ban is that the very act of sharing backing-asset income with holders independently creates a social harm. That claim is much weaker than current regulatory treatment implies.

The stability argument is the strongest version of that additional claim, but it is still too broad. Interest can increase scale and make holders more sensitive to competing returns. Those are real considerations. But scale and rate sensitivity are not the same as fragility. The relevant prudential concerns are asset impairment, maturity transformation, redemption bottlenecks, operational failure, misleading marketing, and correlated exposures. Those risks can arise in a non-interest-bearing stablecoin. Conversely, a remunerated stablecoin with transparent backing and credible redemption may be safer than a non-remunerated stablecoin with opaque or concentrated exposures. The best-known stablecoin stress episodes point to backing quality, custody, redemption design, or protocol interconnections; they do not identify remuneration as the source of fragility. Regulation should target the risk channel, not the label ‘interest’.

Nor does the ‘singleness of money’ argument require an interest ban. Critics worry that stablecoins cannot be true money if they deviate from par or if users must ask questions about issuer quality. But payment efficiency depends on the full cost of the instrument, not on par pricing alone. A stablecoin transfer may be valuable because it is faster, cheaper, or more accessible than a bank wire, even if secondary-market prices sometimes move slightly around par. Interest reinforces that point. A non-interest-bearing stablecoin imposes an opportunity cost on holders when safe short-term rates are positive. Some users may accept that cost for convenience. The law should not make that cost mandatory for all users unless their choice harms others.

The bank-disintermediation objection identifies a possible channel, not a settled welfare loss. Professor Chiu treats the interest prohibition partly as a policy choice to prevent deposit migration that may reduce credit supply. That concern should be taken seriously. But deposit competition is not itself a market failure. The relevant question is whether migration into stablecoins reduces socially valuable lending after banks adjust securities portfolios, deposit rates, wholesale funding, and payment technology. That is an empirical prediction, not a premise.

The same objection appears in the narrow-bank debate. Recent modelling of stablecoins and tokenized deposits treats the choice as a trade-off among payment efficiency, bank credit, risk-shifting, and welfare rather than as a one-directional case against stablecoins. Policymakers worry that very safe payment institutions may attract funds away from conventional banks. Yet if a safer or better-remunerated payment instrument threatens incumbent deposit spreads, the policy problem may be competition over safety and interest, not financial instability. The point is not that stablecoin growth can never affect bank lending. It can. The point is that this effect should be tested rather than assumed. If the pessimistic account is right, exposed banks should reduce relationship lending, small-business credit, or loan supply before they merely reduce securities holdings. A categorical ban assumes that conclusion before observing the adjustment margin.

A better framework would separate three questions that current law tends to conflate. First, what assets may back a stablecoin, and what risks must be disclosed? Second, what redemption, custody, insolvency, and operational duties protect holders? Third, after those duties are satisfied, may the issuer share reserve or backing-asset income with holders? The answer to the third question should be yes. Reserve supervision, disclosure, fraud enforcement, insolvency rights, and market discipline can police backing arrangements directly. None requires regulators to impose zero remuneration as a mandatory price term.

This approach also accommodates Professor Chiu’s concern that stablecoin issuers should clarify the nature of their intermediation. A stablecoin that holds itself out as a payment instrument redeemable at par should make that redemption claim legally and operationally credible. A stablecoin that exposes holders to fluctuating net asset value should be regulated closer to an investment product. But a par-redeemable payment stablecoin that shares backing-asset income with holders need not be pushed out of the payment category for that reason alone.

Stablecoins should therefore be permitted to pay interest. Not because every stablecoin should pay interest. Not because stablecoin issuers deserve lighter regulation than banks. Not because stablecoins are riskless. They should be permitted to pay interest because a blanket ban is not a necessary implication of par redemption. It is a competition rule, a surplus-allocation rule, and a policy choice that should bear the burden of proof. That burden has not been met.

Pedro M Batista is a Lecturer in Commercial, Corporate, and Banking Law, University of Leeds School of Law, and a Research Fellow, New York University School of Law.