Will your crypto rewards survive the CLARITY Act? A plain-English guide to Section 404
Stashing stablecoins to earn a little passive yield? Heads up: lawmakers are tinkering with rules that could turn some of that ‘free money’ into a heavily labeled, activity-driven coupon. The CLARITY Act’s Section 404 is the tiny legal paragraph causing big product headaches for exchanges, wallets, and anyone who likes seeing their balance quietly grow.
What Section 404 actually does
At its core, Section 404 says platforms can’t pay interest or yield that is given “solely in connection with the holding of a payment stablecoin.” In plain English: if you’re getting paid just because you left a stablecoin sitting on a platform, regulators will treat that like interest — and they don’t want stablecoins pretending to be bank deposits.
That knocks out the simplest product: park your stablecoin and collect a steady APY with no extra steps. The law draws a line between being paid for parking money and being paid for participating. If a platform can show users are earning rewards because they did something — bought something, staked or provided liquidity, used the wallet — rather than merely left a balance, the platform has a better shot at staying legal.
The draft explicitly allows “activity-based rewards,” and spells out examples: transaction-linked perks, using a particular wallet or platform feature, loyalty or subscription programs, merchant rebates for acceptance, providing liquidity or collateral, and various governance, validation, or staking activities. In short: use-to-earn and participation mechanics are safer than hold-to-earn.
Section 404 also tightens up marketing and disclosure. Platforms can’t imply a stablecoin is a bank deposit or government-insured, can’t advertise rewards as “risk-free” or directly comparable to deposit interest, and must clearly say who’s paying the reward and what user actions are required. Expect plain-language labels and mandatory explanations — the glorious joy of increased paperwork and the death of vagueness.
On the banking side, regulators are worried that passive stablecoin yields could look like deposit alternatives and speed up money moving out of community banks. The bill even calls for studying deposit outflows so that potential harms to small banks don’t get ignored.
One more crucial sentence: an issuer of a permitted payment stablecoin isn’t automatically treated as paying interest just because a third party offers rewards — unless the issuer “directs the program.” That phrase is a hinge point. Formal control obviously counts, but so do sneaky-looking forms of influence: heavy co-marketing, revenue shares linked to balances, deep technical integrations that route users toward rewards, or contracts that force a platform to describe the coin a certain way.
What will survive, and what will change
If you love the idea of a flat APY for leaving stablecoins idle on an exchange, that’s the riskiest play. The safer route is to attach a real activity requirement: spend, stake, or otherwise participate. Cashback for purchases, merchant rebate-style rewards, and loyalty points tied to transactions are explicitly safer under the draft.
Rewards tied to giving liquidity or posting collateral are likely viable too, but they carry more risk and user friction because they resemble lending or DeFi activity. Wrapping DeFi-style pass-through yield inside a custodial product might still be possible in theory, but expect disclosures and legal scrutiny.
The practical outcome is probably not an all-out ban. Instead, expect a new normal where platforms keep offering perks, but those perks must be structured as engagement or payment features and come with clear, prominent disclosures. Issuers will try to stay hands-off unless they want to be treated as co-responsible for the rewards program — and even faint signs of “direction” could pull them into regulation.
Bottom line for users: don’t assume stablecoin balances are as safe as a bank account. Read the fine print, look for plain statements about who funds a reward, and recognize that many easy-yield products may be redesigned to require a little activity or come with clearer warnings. For product teams: design rewards that reward action, not inertia, and get your disclosure copy lawyered up.