Coinbase and PayPal Still Pay Stablecoin Interest Despite New Ban

Dollar-pegged stablecoins have become integral infrastructure in the crypto economy, bridging digital assets with traditional finance. They serve as a bridge between digital assets and traditional finance, giving the ecosystem both stability and liquidity.

As these coins became more popular, they also attracted more attention from regulators. In the U.S., the GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins) was passed as a major step toward setting clear rules for stablecoin issuers. The legislation sparked industry debate, with critics arguing its transparency requirements and user protection mandates go too far.

Despite tighter oversight, major platforms have discovered legal workarounds that preserve yield offerings while maintaining compliance.

The Interest Ban and What It's Meant to Do

The GENIUS Act explicitly prohibits stablecoin issuers from paying interest or yield based solely on token holdings.

This restriction prevents unlicensed banking activities while reducing systemic risks from speculative behavior. The law aims to draw a clear line between stablecoin issuers and traditional financial institutions so that users don’t mistakenly view such tokens as fully insured deposit alternatives.

The full ban is set to take effect in November 2026, giving companies time to adapt.

What regulators are trying to prevent:

• Mass withdrawals. If stablecoins are backed by volatile assets, a loss of trust could trigger mass redemptions and lead to a collapse in the banking system.
• Blurring the lines. The law seeks to separate issuers from banks to avoid the impression that stablecoins are the same as deposit accounts.
• Customer protection. Not all investors understand the risks of earning yield from digital assets, and the law tries to minimize that exposure.

Workarounds: How Coinbase and PayPal Still Offer Yield

Despite the restrictions, companies like Coinbase and PayPal still offer their users incentives for holding digital currencies.

How do they manage that? It all comes down to legal nuances — specifically, the difference between “issuers” and “service providers.”

The GENIUS Act applies only to the entities that issue stablecoins. Coinbase and PayPal argue that they act as intermediaries, not issuers.

Coinbase and USDC

The USDC token is issued by Circle, which is responsible for minting it and managing its reserves. Coinbase works closely with Circle: both companies co-founded USDC and are members of the Centre consortium, which originally governed the project. However, Coinbase is not the issuer — it simply provides the platform where users can buy, hold, and use the token.

Coinbase provides 4.10% APY on USDC holdings, with premium users earning up to 4.5% APY on the first $10,000 USDC. Rewards accrue daily and are paid out monthly, though rates may vary by region and change over time.

Coinbase's legal position centers on a crucial distinction – rewards originate from the platform, not the token issuer, thus avoiding GENIUS Act restrictions. The reward feature activates automatically once a user buys USDC on Coinbase.

PayPal and PYUSD

Although the PYUSD token carries PayPal’s brand, it is actually issued by Paxos Trust – a licensed New York-based trust company. Paxos is responsible for issuance, reserves, and compliance. PayPal acts as a distributor and integrates the token into its payment services.

The relationship between PayPal and Paxos is governed by a partnership, allowing PayPal to use Paxos infrastructure for launching and supporting PYUSD. This role separation lets PayPal offer users yield on PYUSD without violating the GENIUS Act, which targets issuers specifically.

PayPal offers tiered yields – 4% APY for merchant crypto payments and 3.7% APY for consumer holdings across PayPal and Venmo platforms. Interest is calculated daily and paid monthly.

PayPal sees these incentives as a way to increase customer loyalty and strengthen its position in the digital payments space.

Regulatory Innovation or Creative Compliance?

These workarounds illustrate the fundamental challenge of regulating rapidly evolving digital asset markets. On one hand, regulators want to bring order and protect consumers. On the other, companies are looking for ways to stay competitive and keep their users engaged.

Solutions like those offered by Coinbase and PayPal exist on the edge of formal compliance. Legal experts call this a “workaround” that still fits within the letter of the law. As long as companies don’t break explicit rules, such setups remain permissible.

Will this become the new normal? Time will tell. The law might eventually be revised or tightened. But for now, the drive to earn yield from stablecoins – whether called “interest,” “rewards,” or something else – continues to shape the strategy of top market players.

The regulatory-innovation arms race has only just begun.

This regulatory arbitrage raises broader questions – what prevents exchanges from establishing technically independent but functionally aligned stablecoin issuers? A structure that’s technically independent but functionally aligned could easily issue stablecoins within the same ecosystem and pay out rewards without a hitch. All within the rules. Why not? Given how current regulations are framed, it might even be one of the more elegant ways to stay in the game – and keep users happy with their favorite yield.

On this topic you might also be interested to read: Who Leads the Stablecoin Market in 2025? Key Issuers and Models