When PayPal joined the stablecoin wars in August 2023 with its dollar-backed PYUSD, the crypto industry celebrated the entrance of a TradFi company into a competitive arena dominated by crypto-native firms Tether and Circle. But a year after its launch, PYUSD is still lagging behind its competitors with a market capitalization of less than $1 billion, paling in comparison to Tether’s $117 billion.
In a bid to increase adoption, PayPal is partnering with Anchorage Digital—the only U.S. crypto firm to hold a bank charter—to offer rewards to Anchorage Digital’s userbase of accredited investors who hold PYUSD at its U.S. bank, its Singapore subsidiary, or by means of its noncustodial wallet Porto.
But the launch of the program also raises questions about the regulatory uncertainty around stablecoin interest payments, as the growing asset class remains a jump ball between different U.S. agencies and Congress drags its feet on passing legislation.
Anchorage Digital insists that PYUSD and the rewards program do not constitute a securities offering nor fall under the jurisdiction of banking regulators. Still, the product is charting new territory. “This is the first time a bank is getting involved in the crypto rewards slash interest ecosystem, and that’s really new,” said Todd Phillips, a banking and administrative law professor at Georgia State University, in an interview with Fortune.
The fine print
While stablecoins can be tied to any underlying asset, such as the euro or precious metals, it is U.S. dollar-backed products like Tether and USDC that have exploded in popularity over the past few years. Tether has found success targeting investors outside the U.S. who want to hold dollar-pegged assets, while USDC issuer Circle has focused on crypto app users who want to transact with a stable currency.
In the current era of higher interest rates, the assets that back the stablecoins—typically U.S. Treasuries and similar instruments—have yielded massive profits for their issuers that, for the most part, have not been passed on to holders. This is in part due to the absence of clear regulatory rules around stablecoins, which has made U.S.-based companies wary of offering interest payments. Some yield-bearing stablecoin projects, such as Mountain Protocol, explicitly operate outside the U.S., despite offering dollar-backed products.
The regulatory position of stablecoins remains hazy. While the Securities and Exchange…
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