Federal regulators have clarified that cryptocurrency companies can continue to offer interestlike rewards to customers despite concerns from the banking industry that such programs could drain significant deposits from traditional banks. The new guidance stems from rules implementing the GENIUS Act, legislation enacted last year to formalize regulatory oversight of stablecoin issuers.

Under the updated framework issued by the Office of the Comptroller of the Currency (OCC), issuers of stablecoins—cryptocurrencies typically pegged to a value of one U.S. dollar and backed by bank deposits and Treasury securities—remain prohibited from paying interest directly to holders of their coins. However, cryptocurrency exchanges that trade and custody these stablecoins, such as Coinbase and Robinhood, may pass along earnings generated by the assets backing stablecoins to their customers in the form of interestlike rewards, subject to review on a “case-by-case basis.”

Stablecoins earn returns from the underlying securities, which produce interest or dividends. The central issue provoking debate between banks and crypto firms is whether these returns can be converted into payouts for stablecoin users. Banking groups argue that permitting such rewards increases competition for deposits, as crypto platforms often offer yields significantly higher than those available through traditional bank accounts. For instance, Coinbase can offer yields as high as 3.5% on USDC stablecoin holdings, compared with an average savings account rate of roughly 0.38%, according to Federal Deposit Insurance Corp. data.

Bank representatives warn that this discrepancy could encourage deposit flight, whereby customers withdraw funds from banks to invest in higher-yielding crypto products. This could reduce banks’ capacity to extend loans and pose risks to financial stability, potentially leading to bank failures in extreme cases.

The American Bankers Association criticized the OCC’s decision, asserting that it undermines congressional intent to safeguard local lending and threatens the funding sources that enable banks to fuel the economy. Consumer advocacy groups also expressed unease, highlighting that consumers may mistake crypto reward programs for traditional bank interest without realizing that stablecoins lack protections such as FDIC deposit insurance.

Phillip Basil, director of economic growth and financial stability at the advocacy group Better Markets, asserted that the OCC’s approach allows stablecoin issuers to operate similarly to banks without the safety measures that underpin the U.S. banking system. The ruling has drawn strong opposition from banking interests and consumer advocates alike, who caution that it could introduce new vulnerabilities to the financial ecosystem.

While regulators have carved out regulatory flexibility for crypto platforms to offer rewards, the broader question of how stablecoins will coexist with the traditional banking system remains unsettled. The debate underscores ongoing tensions as lawmakers and regulators strive to balance innovation in digital finance with the imperative to protect consumers and maintain financial stability.