Coinbase and PayPal Already Defy the GENIUS Act: Stablecoin Holders Earn +4.1% in 2025

• What Exactly Does the GENIUS Act Prohibit?
• The Legal Tightrope: Rewards vs. Interest
• Why Investors Are Flocking Back
• The Regulatory Sword of Damocles
• Oligopoly Risks: Big Players Win, Startups Lose
• Q&A: Your Burning Questions Answered

In a bold move that’s shaking up the crypto regulatory landscape, Coinbase and PayPal have found clever ways to bypass the GENIUS Act’s restrictions on stablecoin rewards—offering yields as high as 4.1% to users. This strategic loophole exploits legal gray areas while keeping operations technically compliant, much to the delight of investors and the frustration of regulators. Here’s how the drama unfolded and what it means for the future of stablecoins.

What Exactly Does the GENIUS Act Prohibit?

Signed into law amid 2025’s regulatory frenzy, the GENIUS Act explicitly bans passive yields on regulated stablecoins, targeting annual returns between 3% and 5% that had become industry staples. Republican lawmakers framed these restrictions as a safeguard against systemic risk, arguing that speculative yield products could destabilize the $150B stablecoin market. Yet, within weeks of enactment, major platforms began sidestepping the rules—legally.

The Legal Tightrope: Rewards vs. Interest

Coinbase and PayPal’s workaround hinges on a technicality: neither directly issues the stablecoins generating yields. Coinbase distributes USDC (issued by Circle, from which it divested in 2023), while PayPal’s PYUSD comes from partner Paxos. By labeling payments as "rewards" rather than "interest," they exploit a semantic gap in the legislation. "Our users choose Coinbase for these returns," CEO Brian Armstrong stated in Q2 earnings calls, defending the 4.1% APY on USDC balances. PayPal’s quieter approach uses Paxos-managed mechanisms to deliver comparable yields.

Why Investors Are Flocking Back

With traditional savings accounts offering sub-2% returns in mid-2025, stablecoin yields have become irresistible. Over $8B flooded into USDC and PYUSD wallets post-GENIUS Act as users chased the rare combo of stability and 4%+ returns. "It’s the holy grail for conservative crypto investors," noted BTCC analyst David Lin. "Regulated platforms providing FDIC-insured cash equivalents with DeFi-like yields? That’s disruptive math."

The Regulatory Sword of Damocles

This golden era may be fleeting. The SEC could amend rules to close the "third-party issuer" loophole, or pressure Paxos/Circle to cut ties. Unlike bank deposits, these rewards lack federal insurance—if Coinbase tweaks its policy overnight, yields vanish instantly. Some legislators are already drafting "GENIUS Act 2.0" to expand restrictions to distribution platforms. "This isn’t whack-a-mole; it’s financial regulation," warned Senator Elizabeth Warren in a July CNBC interview.

Oligopoly Risks: Big Players Win, Startups Lose

The loophole favors giants with complex legal infrastructures. Smaller exchanges like Kraken can’t replicate these structures, potentially creating a stablecoin caste system. "We’re witnessing the birth of a yield oligopoly," said CoinMarketCap data head Clara Wu. "The top 3 platforms now control 78% of rewarded stablecoin volumes." This concentration ironically contradicts the GENIUS Act’s goal of curbing systemic risk by creating new centralization hazards.

Q&A: Your Burning Questions Answered

How are Coinbase’s rewards technically different from interest?

They’re structured as discretionary platform incentives rather than contractual interest obligations—a distinction that (for now) keeps them outside GENIUS Act prohibitions.

Could PayPal suddenly stop PYUSD rewards?

Yes. Unlike bank CDs, these programs lack term guarantees. PayPal’s FAQ states rewards may change "based on market conditions or regulatory requirements."

Are rewarded stablecoins safer than DeFi yield farming?

Marginally—while still uninsured, regulated issuers like Circle undergo audits. But as the 2023 USDC depeg showed, no stablecoin is risk-free.