Stablecoin Strategy: How Coinbase and PayPal Circumvent GENIUS Act Limits

In the aftermath of the recent passing of the GENIUS Act, a landmark piece of cryptocurrency legislation, major platforms like Coinbase and PayPal have found a way to continue offering yields on stablecoins, despite mounting regulatory restrictions.

The GENIUS Act, signed into law last month, introduced a comprehensive regulatory framework for stablecoins in the United States. While it seeks to enhance transparency, investor protection, and financial stability, the law specifically restricts stablecoin issuers from offering interest or yield-like features to customers. However, the law appears to have left a critical loophole—one that Coinbase and PayPal are actively and strategically utilizing.

The Stablecoin Yield Dilemma

Stablecoins, such as USD Coin (USDC) and PayPal USD (PYUSD), are digital assets pegged to the value of fiat currencies. While initially seen as low-volatility vehicles for trading and storing value in the crypto space, they have increasingly been used to generate passive income for holders through interest-bearing programs.

Source: X

Under the GENIUS Act, stablecoin issuers are prohibited from offering interest directly to customers unless they comply with banking-level regulations. The rationale is simple: interest-bearing features make these digital assets resemble traditional savings products, potentially blurring the line between securities and currency. The U.S. government wants to avoid systemic risks and shadow banking products that lack proper oversight.

Yet, in a development that has raised both curiosity and controversy, Coinbase and PayPal have continued offering yields ranging from 3.7% to 5% on their respective stablecoin holdings. How are they doing this legally?

Legal Loophole or Clever Structuring?

The answer lies in the structure of the reward programs. According to public statements and legal interpretations shared by the companies, Coinbase and PayPal argue that they are not the issuers of the stablecoins they support. For instance, while USDC is offered on Coinbase, it is technically issued by Circle, a separate entity. Similarly, PYUSD is branded under PayPal but issued by Paxos Trust Company.

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Brian Armstrong, CEO of Coinbase, clarified in a recent statement, “We do not issue USDC. Our yield offerings are not interest payments but rather part of a rewards program funded through Coinbase’s platform revenues.”

In effect, the companies argue that the GENIUS Act does not apply to them because they are not offering bank-like deposit products. Instead, they distribute a portion of their platform-generated income to users who hold stablecoins in their wallets, under the guise of a "rewards" program.

This distinction is more than semantic. It serves as the legal foundation that allows these platforms to keep yields flowing while staying technically compliant with the new federal law.

PayPal’s Strategic Play

PayPal, another dominant player in the digital finance landscape, is taking a similar route. While it promotes PYUSD as part of its expanding ecosystem, it carefully notes that the asset is issued by Paxos, not PayPal itself. Despite this technicality, PayPal offers users an annual return of up to 5% on PYUSD balances.

Source: X

According to a company spokesperson, "Our rewards are not interest in the legal sense. They are part of a promotional strategy to support our users and strengthen our ecosystem."

This reward-based model has enabled PayPal to maintain its competitive edge in the increasingly crowded stablecoin market, attracting both retail users and digital finance enthusiasts.

Industry and Expert Reactions

Industry analysts are split on whether these reward programs truly adhere to the spirit of the law.

"This is a classic case of regulatory arbitrage," said Sheila Warren, CEO of the Crypto Council for Innovation. "The platforms are not technically violating the letter of the law, but they are clearly exploiting a gray area. It will be interesting to see if regulators move to close this loophole."

Others argue that this model reflects the kind of innovation that crypto was meant to foster.

"As long as there is transparency and user consent, allowing platforms to share revenues is not necessarily harmful. In fact, it could be a win-win for platforms and consumers," said Michael Sung, a professor of fintech regulation at NYU Stern.

However, some regulatory voices are less tolerant. Officials from the U.S. Securities and Exchange Commission (SEC) have reportedly flagged this model for review, though no formal action has been taken as of yet. The SEC has previously expressed concern about products that offer returns without sufficient investor protections.

Policy Implications Going Forward

The GENIUS Act was intended to create clear guardrails around the use and management of stablecoins, especially in light of the growing role these digital assets play in global finance. By focusing on issuers rather than platforms, however, it may have unintentionally opened the door for creative interpretations.

The law distinguishes between "issuance" and "distribution," regulating only the former with strict oversight. Platforms that serve as custodians or intermediaries are largely excluded from the new rules—a fact that Coinbase and PayPal have seized upon.

If the current trend continues, Congress may revisit the legislation to include platform-based yield programs. For now, however, users can still earn passive income on their stablecoin holdings, even in a post-GENIUS Act regulatory environment.

Conclusion: Innovation Within Regulation

The cases of Coinbase and PayPal illustrate the complex, evolving relationship between crypto innovation and government oversight. While regulators are working to ensure consumer protection and systemic stability, companies continue to find legal pathways to offer value-added services to their users.

Whether this practice will stand the test of time or be regulated out of existence remains to be seen. But for now, the stablecoin reward programs remain alive and well—driven not by loopholes, but by the precise language of the law.

Writer @Ellena

Ellena is an experienced crypto writer who loves to explore the intersection of blockchain technology and financial markets. She regularly provides insights into the latest trends and innovations in the digital currency space.

 

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