MS Bill_Yield section – PolicyPartner

Executive Summary

SEC. 404(b)(1) prohibits digital asset service providers from paying yield solely for holding payment stablecoins. The prohibition targets intermediaries (exchanges, custodians, wallets)—not issuers. SEC. 404(f)(2) explicitly carves out third-party yield arrangements from issuer attribution. Products structured as securities or DeFi protocols fall outside the payment stablecoin definition entirely.

The Prohibition

SEC. 404(b)(1) — Core Prohibition

A digital asset service provider may not pay any form of interest or yield (whether in cash, tokens, or other consideration) solely in connection with the holding of a payment stablecoin.

Key Distinction: The prohibition applies to service providers (exchanges, custodians, wallet providers)—not payment stablecoin issuers. SEC. 404(f)(2) confirms issuers are not deemed to pay yield solely because a third party independently offers rewards.

Permitted Activities Under SEC. 404(b)(2)

Transaction-based rewards

Platform usage incentives

Loyalty/promotional programs

Merchant acceptance rebates

Liquidity provision

Staking & governance

Bank Lobby Position

Signatories to Treasury Comment Letter (Nov. 2025)

Bank Policy Institute • The Clearing House • American Bankers Association • Consumer Bankers Association • Financial Services Forum

Primary Demands

• Prohibit any economic benefit to holders, not just "interest or yield"

• Presume benefits tied to holding are prohibited (close "solely" loophole)

• Attribute affiliate/partner payments to issuer

• Study "deposit flight from community banks"

Alignment vs. Concessions

Bank Request	Bill Outcome	Status
Prohibit passive yield on payment stablecoins	Core prohibition adopted—applies to service providers under SEC. 404(b)(1)	ALIGNED
Marketing restrictions (no FDIC claims)	SEC. 404(c) prohibits claiming FDIC insurance or "risk-free" yield	ALIGNED
Study deposit flight to community banks	SEC. 404(e) mandates Fed/OCC/FDIC study with exact framing	ALIGNED
Presume any benefit tied to holding is prohibited	Enumerated carveouts in SEC. 404(b)(2) permit transaction rewards, loyalty programs, staking	CONCESSION
Prohibit "any economic benefit" (not just yield)	Narrower "interest or yield" language retained; non-yield structures permitted	CONCESSION
Attribute affiliate/partner payments to issuer	SEC. 404(f)(2) explicitly protects issuers from third-party attribution unless issuer "directs" program	CONCESSION

Illustrative Examples by Product Type

Direct Rebase Model

Example

Prohibited

Licensed issuer pays yield directly to holders via daily token rebase mechanism. Falls squarely within prohibition if service provider processes the rebase distribution.

Fintech Wallet Rewards

Example

Uncertain

Fintech parent (not stablecoin issuer) pays rewards to wallet users holding stablecoins. Structured as "loyalty program." SEC. 404(b)(2) carveout may apply; outcome depends on rulemaking.

Exchange Yield Program

Example

Uncertain

Exchange pays yield on stablecoin balances, funded by revenue-share with issuer. Third-party arrangement under SEC. 404(f)(2); "directing" language creates ambiguity.

Yield-Bearing Security

Example

Exempt

Dollar-denominated token offered under Reg S or Reg D as a security. Yield derived from Treasury reserves. Outside payment stablecoin definition—securities law governs.

Tokenized Money Market Fund

Example

Exempt

Registered investment product with daily dividend accrual. Qualified purchasers only. Regulated as fund share, not payment stablecoin.

DeFi Yield Wrapper

Example

Exempt

Permissionless smart contract wraps stablecoin deposits and distributes protocol revenue as yield. No identifiable issuer or service provider—falls outside SEC. 404 scope.

Structural Assessment

What Survives

Payment function intact. Yield available through securities wrappers, tokenized funds, DeFi protocols, and carveout activities (staking, liquidity, loyalty). Third-party arrangements protected under SEC. 404(f)(2) unless issuer "directs" program.

What Is Prohibited

Service providers paying yield solely for holding payment stablecoins. Simple "hold stablecoin, earn yield" UX from regulated US intermediaries. Direct pass-through of T-bill reserve income by service providers.

Net Effect

Payment stablecoins proliferate as payment rails. Yield competition shifts to securities-structured products, DeFi wrappers, and third-party arrangements. Service providers compete on payments; structured products compete on yield.