A single paragraph buried in a 278-page bill could eliminate billions of dollars in stablecoin rewards overnight. Section 404 of the Digital Asset Market Clarity Act—the most consequential piece of crypto legislation since the GENIUS Act—would ban exchanges and platforms from paying yield to anyone who simply holds a stablecoin. No more 4% on your USDC at Coinbase. No more passive rewards in your wallet. Banks lobbied hard for this provision, arguing that yield-bearing stablecoins threaten to drain $1.5 trillion in deposits from the regulated banking system. The crypto industry fired back, with Coinbase CEO Brian Armstrong dramatically withdrawing support and warning that Congress was about to hand foreign CBDCs a competitive weapon. The result: the bill stalled in the Senate on January 15, 2026, amid some of the most intense lobbying in crypto history. But the fight is far from over, and the outcome will determine whether the $317 billion stablecoin market remains a source of competitive returns for everyday users—or becomes a zero-yield parking lot that only benefits issuers and banks. Here's what happened, what comes next, and—most importantly—how to keep earning yield on your stablecoins no matter what Congress decides.

What Is the CLARITY Act and Why Should You Care?

The Digital Asset Market Clarity Act (H.R. 3633)—known as the CLARITY Act—is the most comprehensive crypto market structure bill in U.S. history. Introduced by House Financial Services Chairman French Hill on May 29, 2025, the legislation establishes a regulatory framework that divides digital asset oversight between the SEC and CFTC, creates registration requirements for exchanges, brokers, and custodians, and defines which tokens qualify as securities versus commodities. The House passed its version during "Crypto Week" in July 2025. The Senate Banking Committee released a revised 278-page draft on January 12, 2026, incorporating more than six months of bipartisan negotiations.

But buried in Title IV is the provision that ignited a war between Wall Street and the crypto industry: Section 404, the stablecoin yield ban.

CLARITY Act Key Provisions Overview

Section 404 Explained: What Exactly Gets Banned?

The critical language in Section 404 states that "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." This extends the GENIUS Act's prohibition on issuers (like Circle or Tether) paying interest directly, and applies it to the platforms (like Coinbase, Kraken, or wallets) that currently offer rewards programs funded by revenue-sharing arrangements with those issuers.

However, the operative word is "solely." The bill carves out a substantial list of activity-based exceptions that would remain legal, creating a complex regulatory boundary between passive holding and active participation.

What's Banned vs. What's Still Allowed Under Section 404

The distinction between "passive holding" and "activity-based" rewards is the bill's most contested boundary. Banks argue the exceptions are too broad and allow easy circumvention. Democratic Senator Angela Alsobrooks, who originally proposed the activity-based carve-out, reportedly criticized the Senate draft for not reflecting her intent and creating too many exemptions that undermine the prohibition. Meanwhile, CSBS (Conference of State Bank Supervisors) urged Congress to broaden the ban to cover indirect payments through affiliates, revenue-sharing arrangements, and situations where users perform only "administrative or ministerial" tasks like selecting a specific wallet.

Banks vs. Crypto: Why This Fight Is Really About $1.5 Trillion

At its core, the stablecoin yield debate is a fight over deposits—the lifeblood of banking. When users hold stablecoins earning 4% on Coinbase instead of keeping cash in a savings account paying 0.1%, money leaves the banking system. Banks can't lend deposits they don't have, and they can't profit from the spread between deposit rates and loan rates if those deposits migrate to crypto platforms. This isn't a theoretical concern: stablecoin market capitalization has grown from $20 billion in 2020 to over $317 billion in January 2026, and the trajectory is accelerating.

The Stakeholder Showdown

The Deposit Drain: What the Data Shows

The banking lobby's argument isn't just fear-mongering—it's backed by Federal Reserve research. A December 2025 FEDS Note from the Board of Governors modeled the impact of stablecoin growth on bank deposits and lending capacity, and the numbers are stark:

The math is straightforward: stablecoin issuers hold reserves in Treasuries earning ~3.6%, while banks pay depositors ~0.1% and lend at much higher rates. When crypto platforms share reserve interest as rewards, users rationally move money from 0.1% savings accounts to 4% stablecoin rewards. The Kansas City Fed's August 2025 analysis calculated that if the stablecoin market grows from $250 billion to $900 billion—a projection within the range of JPMorgan and Standard Chartered estimates—the resulting shift could represent a 1% decrease in total bank assets and a $325 billion reduction in bank loans to the economy.

For the crypto industry, the counterargument is equally compelling: banks have had decades to compete on rates and technology and have chosen not to. Stablecoin rewards exist because traditional banking refuses to share the interest earned on customer deposits. If Congress eliminates the competition rather than requiring banks to innovate, it protects incumbent profits at the expense of consumer returns—the opposite of the free-market principles crypto regulation claims to promote.

The GENIUS Act "Loophole" That Started It All

To understand the CLARITY Act fight, you need to understand how the GENIUS Act created the battlefield. When the GENIUS Act became law on July 18, 2025—the first federal stablecoin legislation in U.S. history—it explicitly prohibited stablecoin issuers from paying interest or yield to holders. Circle can't pay you for holding USDC. Tether can't pay you for holding USDT. But the law said nothing about what platforms, exchanges, or third parties could do.

This created what banks call a "loophole" and what the crypto industry calls "the whole point." The model works like this:

The American Action Forum described this dynamic bluntly: "The incentive to use interest to attract dollars into stablecoin is clear; Congress should have recognized that it was possible to replicate the incentives without using interest per se." The CLARITY Act's Section 404 is Congress's attempt to close this gap—but the proposed solution has fractured the coalition that passed the GENIUS Act with strong bipartisan support.

Similar revenue-sharing models exist across the stablecoin ecosystem. PayPal partners with Paxos (the issuer of PYUSD) and can offer rewards for holding PYUSD on Venmo despite the GENIUS Act's issuer restrictions. Any wallet, exchange, or platform can theoretically run the same playbook—receive reserve income from an issuer relationship and redistribute it as "rewards" to users. This is precisely the structure Section 404 targets.

How It All Went Down: The January 2026 Timeline

While the U.S. Debates Banning Yield, China Does the Opposite

The global context makes the U.S. stablecoin yield debate even more consequential. On December 29, 2025, the People's Bank of China announced that starting January 1, 2026, commercial banks will pay interest on digital yuan (e-CNY) holdings—making it the world's first interest-bearing central bank digital currency. The PBOC explicitly shifted the digital yuan from "digital cash" to "digital deposit money," with deposit insurance protection and integration into banks' standard asset-liability operations.

The irony is hard to miss: while the U.S. Congress debates prohibiting private stablecoin yields to protect banks, China is deploying government-backed digital currency yields to drive adoption. By November 2025, the digital yuan had processed 3.48 billion transactions worth 16.7 trillion yuan ($2.38 trillion), and the interest-bearing framework is designed to accelerate this momentum further.

The Blockchain Association framed this contrast as a national security issue: "If Congress weakens dollar-based stablecoins by banning rewards to protect legacy revenue, it hands foreign central bank digital currencies a competitive advantage just as global settlement moves onchain." Whether or not you agree with the framing, the competitive dynamic is real—and the global stablecoin race doesn't pause while Congress debates amendments.

What the Yield Ban Means for DeFi and Crypto Investors

If Section 404 becomes law in its current form, the impact on the stablecoin ecosystem will be profound but uneven. Passive holding rewards—the simplest, most accessible way for retail users to earn yield—would disappear from regulated U.S. platforms. But the DeFi ecosystem and active yield strategies would remain largely untouched, creating a two-tier system where sophisticated users continue earning while casual holders lose out.

Impact Assessment by User Type

How to Protect Your Stablecoin Yields: Strategies That Survive the Ban

Whether Section 404 passes in its current form, a modified version, or doesn't pass at all, the regulatory direction is clear: passive stablecoin holding rewards face increasing scrutiny. Smart investors are already diversifying into yield strategies that fall squarely within the "activity-based" exemptions—or operate outside the reach of U.S. platform-level regulation entirely.

Yield-Bearing Stablecoins: The New Frontier

A new class of stablecoins generates yield inherently—not through platform rewards programs, but through the token's design itself. These tokens represent exposure to Treasury yields, DeFi lending, or derivative strategies, and the interest accrues directly within the token's value. JPMorgan analysts predict yield-bearing stablecoins could grow from 6% to as much as 50% of total stablecoin market capitalization.

CeFi Yield Optimization: Active Strategies Beat Passive Bans

The key regulatory distinction under Section 404 is between passive holding (banned) and active deployment (allowed). CeFi yield platforms like EarnPark operate on the "active" side of this line—they don't simply pay you for holding stablecoins. Instead, they deploy your assets across diversified, vetted strategies including institutional lending, DeFi protocol integration, and treasury management. This active deployment model falls outside the scope of Section 404's prohibition on rewards paid "solely in connection with the holding" of stablecoins.

For investors who want stablecoin yields without the complexity of managing multiple DeFi positions, wallet signers, and protocol risks, CeFi yield optimization platforms offer a compliant middle ground: higher yields than passive holding rewards, professional risk management, and a user experience that doesn't require DeFi expertise.

Investor Strategy Framework by Risk Profile

What Happens Next: Predictions and Scenarios

The CLARITY Act's path forward is uncertain, but the major possibilities can be mapped. Each scenario carries different implications for stablecoin yields, DeFi regulation, and the broader crypto market.

Regardless of which scenario plays out, the direction of travel is clear: regulation is coming, and stablecoin yield models will evolve. The winners will be platforms and protocols that build compliant yield infrastructure today, and investors who diversify beyond passive holding rewards into active, defensible strategies.

The Bottom Line: Don't Wait for Congress to Decide Your Yields

The CLARITY Act stablecoin yield debate captures a defining tension in crypto's mainstream adoption: can digital assets offer consumers better returns than traditional banking, or will incumbents use legislation to protect their deposit monopoly? The answer isn't binary, and the most likely outcome is a compromise that eliminates the simplest passive rewards while preserving the DeFi yield ecosystem that has always been crypto's competitive advantage.

For stablecoin holders, the message is clear: don't keep all your yield eggs in one platform's passive rewards basket. Whether the CLARITY Act passes, stalls, or evolves, the investors who will continue earning competitive returns are those who actively manage their stablecoin positions—through DeFi lending, yield-bearing stablecoins, liquidity provision, or professional yield optimization platforms like EarnPark that deploy capital across diversified strategies. The stablecoin yield era isn't ending—it's just getting more sophisticated.

Frequently Asked Questions

What is the CLARITY Act Section 404 stablecoin yield ban?

Section 404 of the Digital Asset Market Clarity Act prohibits digital asset service providers from paying "any form of interest or yield" solely for holding a payment stablecoin. It extends the GENIUS Act's issuer-level ban to platforms and exchanges, while carving out exceptions for activity-based rewards like transaction incentives, loyalty programs, and DeFi participation.

Does the CLARITY Act ban ALL stablecoin yield?

No. It bans passive holding rewards but allows activity-based yield including DeFi lending (Aave, Compound), liquidity provision, staking, governance participation, loyalty programs, and transaction-based rewards. CeFi platforms that actively deploy stablecoins into diversified strategies, like EarnPark, operate outside the scope of the passive holding prohibition.

Why did Coinbase oppose the CLARITY Act?

Stablecoin-related revenue accounts for nearly 20% of Coinbase's total revenue ($355 million in Q3 2025). The yield ban would directly threaten this income stream and Coinbase's USDC rewards program. CEO Brian Armstrong called the provisions "poison pills" and warned the bill would let banks shut out crypto competition.

Why do banks want to ban stablecoin yields?

Banks argue that yield-bearing stablecoins function as uninsured deposits that drain money from the regulated banking system. Federal Reserve research projects that stablecoin growth could reduce bank lending capacity by $190–$408 billion, disproportionately impacting community banks that fund local businesses and homebuyers.

What is the current status of the CLARITY Act?

As of February 2026, the bill is in limbo. The Senate Banking Committee postponed its markup after Coinbase's withdrawal and has pivoted to housing legislation. The Senate Agriculture Committee advanced its version on January 29, 2026 without Democratic support. The White House is hosting compromise negotiations, and Senator Tim Scott believes the bill will pass before the 2026 midterms.

Can I still earn yield on stablecoins if the ban passes?

Yes. DeFi lending, liquidity provision, yield-bearing stablecoins (sDAI, sUSDe, USDY), and CeFi yield optimization platforms using active strategies all remain available. The ban specifically targets passive holding rewards paid by platforms and issuers, not interest earned from actively deploying stablecoins.

What did China do differently with digital currency yield?

China moved in the opposite direction. From January 1, 2026, Chinese commercial banks must pay interest on digital yuan (e-CNY) holdings—the first interest-bearing CBDC globally. The PBOC shifted the digital yuan from "digital cash" to "digital deposit money" with full deposit insurance coverage, explicitly using yield as an adoption driver.

How does the GENIUS Act differ from the CLARITY Act on yield?

The GENIUS Act (July 2025) banned stablecoin issuers from paying yield, but did not restrict platforms. The CLARITY Act extends this ban to platforms and exchanges, attempting to close what banks call the "rewards loophole" that allowed companies like Coinbase to share issuer revenue as user rewards.

Will DeFi lending protocols like Aave be affected?

Not directly under the current draft. DeFi lending constitutes active participation (lending to borrowers), not passive holding. However, the regulatory interpretation of DeFi activities under the final law could evolve, and users should monitor guidance from the SEC and CFTC during the 18–24 month rulemaking period after passage.

How should I position my stablecoin portfolio now?

Diversify away from single-platform passive rewards. Consider allocating across DeFi lending (Aave/Compound), yield-bearing stablecoins (sDAI, USDY), CeFi yield optimization platforms (EarnPark), and DEX liquidity provision. This multi-strategy approach protects yields regardless of how the CLARITY Act evolves.