The CLARITY Act: How Congress Is Rewriting the Rules on Stablecoin Yield

The United States now has two federal laws shaping whether stablecoin yield can legally exist. The GENIUS Act, signed into law in July 2025, imposed a blanket prohibition: payment stablecoin issuers cannot pay interest or yield to holders. The CLARITY Act (H.R. 3633), which passed the Senate Banking Committee in May 2026, introduces a more nuanced approach: ban passive yield, but allow activity-based rewards tied to actual usage.

This distinction between "buy and hold" versus "buy and use" will determine which stablecoin products survive federal regulation, which must restructure, and what new models emerge. For anyone building on stablecoin payment rails, understanding both laws is no longer optional.

The GENIUS Act Baseline: No Yield, Period

The Guiding and Establishing National Innovation for U.S. Stablecoins Act (S. 1582) became the first comprehensive federal stablecoin law when President Trump signed it on July 18, 2025. The Senate passed it 68-30 on June 17, 2025, and the House followed with a 308-122 vote on July 17, 2025.

Section 4(a)(11) of the GENIUS Act contains the yield prohibition that set the baseline for every subsequent debate. The statute states that no permitted payment stablecoin issuer shall pay holders "any form of interest or yield (whether in cash, tokens, or other consideration) solely in connection with the holding, use, or retention of such payment stablecoin."

The language is deliberately broad. It covers cash payments, token distributions, rebasing mechanisms, and any other form of consideration. The prohibition applies to all permitted payment stablecoin issuers regulated under the Act, including both federally chartered and state-licensed issuers. There are no explicit exceptions for activity-based rewards, DeFi protocols, or third-party arrangements.

What counts as a "payment stablecoin": Under the GENIUS Act, a payment stablecoin is a digital asset designed for payments or settlement, obligated to convert for a fixed monetary value, and representing that the issuer will maintain stable value. This definition excludes national currencies and bank deposits but captures USDC, USDT, and USDB.

The policy rationale is straightforward: payment stablecoins should function as payment instruments, not as uninsured deposit substitutes that compete with FDIC-insured bank accounts. Congress wanted to prevent a scenario where consumers park savings in high-yield stablecoins without the protections that come with traditional banking.

The CLARITY Act Compromise: Section 404

The Digital Asset Market Clarity Act covers far more than stablecoins. It is comprehensive market structure legislation addressing exchanges, custody, derivatives, and digital asset classification. But its stablecoin yield provisions, finalized in the Tillis-Alsobrooks compromise announced on March 20, 2026, represent the most consequential refinement of the GENIUS Act's yield prohibition.

Section 404 maintains the core prohibition but draws a critical distinction. It prohibits yield that is "economically or functionally equivalent to the payment of interest or yield on an interest-bearing bank deposit." That phrasing matters. Rather than banning all forms of value distribution to stablecoin holders, it targets specifically the deposit-like behavior that concerned legislators in the first place.

What Section 404 Prohibits

The prohibition covers any arrangement where a holder receives yield solely for holding stablecoins in a wallet. If a user buys $10,000 in stablecoins, puts them in a wallet, and earns 4% APY without doing anything else, that arrangement violates Section 404. The mechanism does not matter: whether the yield comes from rebasing, reward token distribution, or direct interest payments, passive accrual on idle balances is prohibited.

What Section 404 Permits

Section 404 explicitly carves out "activity-based or transaction-based rewards and incentives" tied to what the law calls "bona fide activities." The compromise enumerates seven permissible categories:

• Payment and settlement rewards tied to actual transaction processing
• Platform usage incentives for wallet or application engagement
• Liquidity provision rewards for supplying liquidity pools or lending markets
• Staking and validation incentives for governance or ecosystem participation
• Loyalty and subscription program rewards
• Merchant acceptance rebates for businesses accepting stablecoins
• Trading volume rewards based on activity

The critical distinction: the user must be doing something with their stablecoins, not just holding them. The law draws the line at active participation versus passive accumulation.

Buy and Use vs. Buy and Hold

The practical effect of Section 404 creates two regulatory categories for stablecoin yield products. Understanding which side a product falls on determines its legal viability.

This framework mirrors how traditional finance already works. Banks cannot pay interest on demand deposit accounts above certain thresholds without regulatory constraints, but they can offer cashback rewards, loyalty points, and merchant discounts. Section 404 applies the same logic to stablecoins: use them as payment instruments and you can earn rewards; use them as savings vehicles and you cannot.

The OCC's Rebuttable Presumption

On March 2, 2026, the Office of the Comptroller of the Currency issued a proposed rule implementing the GENIUS Act that significantly expanded the yield prohibition beyond what the statute explicitly covers. While the GENIUS Act only prohibits the issuer itself from paying yield, the OCC's rule extends the prohibition to affiliates and related third parties.

How the Presumption Works

Section 15.10(c)(4)(i) of the proposed rule creates a rebuttable presumption: if a stablecoin issuer has any contract, agreement, or arrangement with an affiliate or related third party that results in yield being paid to stablecoin holders, the issuer is presumed to be violating the law. The OCC stated its intent clearly: "The OCC's approach is intended to ensure that the prohibition cannot be circumvented through indirect or creative structuring."

The rule broadly defines "related third party" to include anyone offering yield to stablecoin holders as a service, anyone for whom the issuer creates white-label stablecoins, and any entity operating under the issuer's branding.

Rebutting the Presumption

Issuers can attempt to demonstrate that an arrangement does not violate the prohibition by submitting written documentation to the OCC. However, the agency characterized such structures as "highly likely" evasion attempts, setting a deliberately high bar for rebuttal. The comment period closed on May 1, 2026, with the American Bankers Association and 52 state banking associations urging the OCC to strengthen the rule further.

Limited carve-outs exist: Merchants can independently offer discounts for stablecoin payments without triggering the presumption. Issuers can share profits with non-affiliate partners in white-label arrangements. These narrow exceptions reinforce the buy-and-use framework: merchant discounts reward transaction activity, not passive holding.

Which Yield Products Survive

Current yield-bearing stablecoins fall into distinct regulatory risk categories under the combined GENIUS Act and CLARITY Act framework. The analysis depends on whether each product's yield mechanism constitutes passive accrual or activity-based reward.

High Risk: Passive Yield Products

Products that automatically pay yield to holders without requiring any action face the most direct conflict with Section 4(a)(11) of the GENIUS Act and Section 404 of the CLARITY Act.

Mountain Protocol's USDM uses a rebasing mechanism where wallet balances automatically increase daily to reflect underlying Treasury yield. At approximately 5% APY as of March 2026, this represents the most clearly problematic structure: yield accrues "solely in connection with holding," directly matching the statute's prohibited language.

Sky Protocol's sDAI (the legacy Dai Savings Rate token) generates 4-7% APY through automated interest accrual in a vault. Holders deposit DAI and receive yield without further action. Under the OCC's rebuttable presumption framework, if Sky's arrangement with its stablecoin issuance is deemed an affiliate relationship, the yield could trigger the prohibition.

Moderate Risk: Synthetic and Wrapped Products

Ethena's sUSDe, which wraps USDe into a yield-bearing token generating approximately 3.6-4.8% APY through delta-neutral funding rate strategies, occupies a more ambiguous position. The yield derives from active market-making activity (short perpetual futures positions), not from Treasury reserves. Whether regulators classify this as "economically equivalent" to deposit interest remains unresolved.

Lending receipt tokens like Aave's aUSDC and Compound's cUSDC present a stronger case for the activity-based exception. Users deposit stablecoins into lending protocols, which deploy capital to borrowers. The yield comes from lending activity, not passive holding. Under the CLARITY Act's bona fide activities framework, these could qualify under the "liquidity provision" category.

The Rulemaking Gap

A critical detail in the CLARITY Act: Section 404 does not define "bona fide activities" in the statute itself. Instead, it directs the SEC, CFTC, and Treasury Secretary to jointly establish the definition through rulemaking within one year of enactment. This means that even if the CLARITY Act passes the full Senate and is signed into law, the actual boundaries between prohibited and permitted yield will not be clear until 2027 at the earliest.

This regulatory gap is by design. Senators Tillis and Alsobrooks intentionally left the definition to agency rulemaking to allow industry input through the notice-and-comment process. The crypto industry, including Coinbase and Circle, accepted this compromise, viewing delegated rulemaking as preferable to a rigid statutory definition that could quickly become obsolete.

But the gap creates uncertainty. Products operating in the grey zone between clear passive yield and clear activity-based rewards face a period of legal ambiguity. Issuers must decide whether to continue operating, to restructure preemptively, or to wait for regulatory guidance that may take over a year to arrive.

What This Means for DeFi Protocols

DeFi protocols face a structural challenge under Section 404. Most yield farming strategies involve depositing stablecoins into a protocol and receiving yield: a pattern that resembles passive holding from a regulatory perspective, even when the underlying protocol is actively deploying capital.

The distinction may hinge on the user's role. If a user deposits stablecoins into a lending pool and the protocol lends those funds to borrowers, the user is providing liquidity: an activity explicitly listed in Section 404's bona fide categories. But if the user simply holds a rebasing stablecoin that appreciates in value, there is no identifiable activity beyond possession.

Protocol Design Implications

DeFi builders will likely need to restructure yield products to emphasize the active component. This could mean:

• Requiring explicit opt-in actions (staking, delegation, or governance participation) before yield accrues
• Tying rewards to measurable activities like transaction frequency, governance votes cast, or liquidity provided
• Separating the payment stablecoin from the yield mechanism: users hold the stablecoin for payments and separately opt into a regulated investment product for yield
• Implementing time-limited reward programs that function as promotional incentives rather than ongoing interest

GENIUS Act vs. CLARITY Act: A Comparison

The two laws address stablecoin regulation from different angles and with different scopes. Understanding how they interact is essential for compliance.

If the CLARITY Act becomes law, it will not repeal the GENIUS Act's yield prohibition. Instead, Section 404 effectively layers on top: providing the exceptions and nuance that the GENIUS Act's blanket ban lacked. The result is a regulatory framework where passive yield remains illegal, but usage-based rewards have a statutory pathway to compliance.

Implications for Payment-Focused Stablecoins

The CLARITY Act's distinction between passive holding and active usage creates a natural advantage for stablecoins designed around payments rather than savings. If the regulatory framework rewards transactional activity and penalizes idle balance accumulation, stablecoins built for spending and transferring align with the law's intent by default.

This is particularly relevant for dollar-denominated Bitcoin payment networks. USDB on Spark, for example, is designed for sending, receiving, and spending: not for parking funds in a yield vault. When a user receives USDB and transfers it to a merchant or converts it to Bitcoin, that is transactional activity. The buy-and-use model aligns naturally with how dollar-denominated payments work on Bitcoin Layer 2 networks.

For wallets built on payment rails, the CLARITY Act framework opens the door to transaction-based rewards: cashback on stablecoin purchases, merchant rebates, or loyalty programs tied to payment frequency. These are the exact models that Section 404 explicitly permits.

What Happens Next

The CLARITY Act advanced from the Senate Banking Committee with a 15-9 vote on May 14, 2026, with Senators Gallego and Alsobrooks joining Republicans. It is now on the full Senate calendar, though several issues remain unresolved before a floor vote: reconciliation with the House version on yield definitions, DeFi treatment, and developer protections.

Three regulatory developments will determine how this plays out:

1. The OCC's final rule implementing the GENIUS Act yield prohibition. The comment period closed May 1, 2026, and the final rule will establish how aggressively regulators enforce the affiliate presumption.
2. Full Senate passage of the CLARITY Act. If it passes and survives House-Senate reconciliation, the bona fide activity exceptions become law, creating the legal space for usage-based rewards.
3. The joint SEC-CFTC-Treasury rulemaking defining bona fide activities. This process, triggered by the CLARITY Act's passage, will take up to a year and will determine the precise boundary between permitted and prohibited yield.

For builders in the stablecoin space, the strategic direction is clear regardless of the exact timeline: design for usage, not holding. Products that generate value through payments, commerce, and active participation have a legal pathway. Products that generate value through passive yield on idle balances do not.

Positioning for the New Rules

The stablecoin yield landscape is bifurcating. On one side, Treasury-backed rebasing tokens and passive savings vaults face existential regulatory risk. On the other, payment-focused stablecoins with transaction-based reward models have explicit statutory support.

If you are exploring how payment-focused stablecoins work in practice, General Bread provides a Spark-powered wallet where USDB is used for real transactions, not yield farming. For a deeper look at how the broader stablecoin yield market is evolving, or how the GENIUS Act's regulatory framework works in detail, those research articles provide additional context.

The regulatory message from Congress is consistent across both laws: stablecoins are payment instruments first. The CLARITY Act simply acknowledges that payment instruments can come with rewards, as long as the rewards flow from usage rather than inertia.

This article is for educational purposes only. It does not constitute financial or investment advice. Bitcoin and Layer 2 protocols involve technical and financial risk. Always do your own research and understand the tradeoffs before using any protocol.