The Guiding and Establishing National Innovation for U.S. Stablecoins Act (“GENIUS Act”) establishes the first comprehensive federal framework for “payment stablecoins” in the United States. The bill’s most discussed, and debated, provision is Section 4(a)(11), which provides:

No permitted payment stablecoin issuer or foreign payment stablecoin issuer shall pay the holder of any payment stablecoin any form of interest or yield (whether in cash, tokens, or other consideration) solely in connection with the holding, use, or retention of such payment stablecoin.

The banking industry and many others argue that Congress prohibited stablecoin issuers from paying interest or yield to stablecoin holders because they envisioned stablecoins as a means of payment – thus the term “payment stablecoin” – and not as a deposit substitute. Thus, Congress’ intent is undermined when third-party platforms, like crypto exchanges or affiliates of stablecoin issuers, offer rewards on stablecoin holdings. The crypto industry counters that if Congress wanted to prohibit third parties from offering their customers interest or rewards on their stablecoin holdings, it would have explicitly included such language in the GENIUS Act.

While the so-called “payment of interest loophole” remains at the forefront of ongoing policy debates and rulemaking efforts, relatively little attention has been placed on the permissibility of current distribution arrangements between stablecoin issuers and crypto exchanges. In a new article, I focus on the distribution agreement between Circle Internet Financial, LLC (“Circle”) and Coinbase  Global, Inc. (“Coinbase”) and argue that Circle is likely violating Section 4(a)(11) of the GENUIS Act by paying Coinbase a portion of the reserve income from its stablecoin ( “USDC”), based explicitly on the amount of USDC held on Coinbase’s custodial platform.

Circle’s S-1 filing – submitted in connection with its public listing earlier this year – concedes that the “greater the proportion of USDC in circulation held on Coinbase’s platform, the greater the proportion of reserve income payable to Coinbase.”

The legality of this payment hinges on a deceptively simple statutory question: Is Coinbase the “holder” of USDC stored in Coinbase-hosted wallets? In other words, is the holder the party with control of the payment stablecoin or the party with the ultimate economic interest in the payment stablecoin, regardless of control?

The definition of “holder” has profound consequences – not only for Circle, but for the architecture of custodial stablecoin markets. The term, however, is not defined in the GENIUS Act, necessitating recourse to (1) traditional financial concepts of asset custody, (2) the Uniform Commercial Code (“UCC”) and the contractual terms governing custodial wallets, such as Coinbase’s User Agreement, (3) the industry’s litigation positions about asset control, and (4) digital-asset-specific regulatory guidance.

Under prevailing crypto-asset law, federal guidance, Coinbase’s own litigation theory, and the express custodial structure outlined in Coinbase’s User Agreement, Coinbase is likely the “holder” of USDC in hosted wallets. Because Circle pays Coinbase interest-like distributions solely by virtue of Coinbase holding USDC, Circle’s arrangement is in tension with, and likely violates, the GENIUS Act.

Circle’s Payment of Reserve Income to Coinbase

Circle’s S-1 repeatedly describes its distribution arrangement with Coinbase. Under both the pre-2023 and post-2023 agreements, Circle compensates Coinbase in proportion to the amount of USDC Coinbase holds.

This arrangement creates a clear incentive for Coinbase to take affirmative steps to increase the amount of USDC held on its platform. Thus, the company prominently markets “3.85% rewards by simply holding USDC on Coinbase.” As a result of these efforts, Circle paid Coinbase $907.9 million in 2024 in distribution fees. These payments – derived directly from interest earned on USDC reserves – function economically as interest sharing to Coinbase.

Who Is the “Holder” of USDC in a Custodial Wallet?

If Coinbase is the “holder” of USDC in its custodial wallets, then Circle is paying interest to a holder solely for holding the stablecoin. That falls squarely within Section 4(a)(11)’s prohibition. Thus, determining whether Coinbase is the “holder” is dispositive.

In traditional financial markets, the “holder” of an asset is the party with physical possession and control of the asset. This contrasts with an “entitlement holder” that has the economic rights to a security held in book-entry form through intermediaries. While the customer retains a beneficial interest, the custodian is typically the legal possessor and holder of the asset.[1]

In crypto markets, by contrast, asset control is typically defined by access to private keys – cryptographic credentials that confer unilateral control over digital assets – thus, the crypto industry’s longstanding maxim –“Not your keys, not your coins.” Users who self-custody their crypto assets are both the beneficial and legal owners, with direct and sole control over transfers.

When crypto assets are held with a centralized exchange or custodian, the platform often assumes legal possession using omnibus accounts. In such arrangements, users generally maintain a contractual claim to a specific type of crypto asset, rather than to identifiable individual units.

This shift from intermediated control to cryptographic access introduces new risks – such as key loss or platform insolvency – and challenges traditional notions of asset ownership and custody. Unfortunately, we have seen these risks come to bear in the wake of numerous crypto platform failures over the years, notably FTX and Celsius. In these and other cases, courts have looked to the platform’s terms of service or user agreement to guide them. A review of Coinbase’s user agreement supports the argument that Coinbase, rather than its customers, is the holder of customer crypto-assets, including USDC.

Section 2.7 says that “[a]ll Supported Digital Assets held in your Digital Asset Wallet are custodial assets held by Coinbase for your benefit….” (emphasis added). Furthermore, Section 2.7.2 states that “[a]ll Supported Digital Assets credited to the Digital Asset Wallet will be treated as “financial assets” under Division 8 of the California Uniform Commercial Code (“Division 8”)” and that “Coinbase is a “securities intermediary” as used in Division 8 with respect to Supported Digital Assets, and your Digital Asset Wallet is a “securities account” as used in Division 8.” This is the same structure by which investors “own” stocks held in street name at Charles Schwab or Fidelity and is further proof that Coinbase – not the end user – is the legal holder of digital assets in its custodial wallets.

Article 8 of the UCC emerged to deal with the modern “indirect holding system,” where most securities are not held directly by individuals but through brokers, custodians, and clearinghouses. Under Article 8, an investor acquires a “security entitlement,” but does not hold the securities themselves. Instead, a “securities intermediary,” such as a broker, is the “holder” of the securities.

Digital assets are not inherently Article 8 financial assets, but by declaring them as such in its contract with users, Coinbase brings them under the Article 8 regime governing custodial securities accounts.[2] By labeling itself a securities intermediary and treating customer wallets as securities accounts, Coinbase is adopting the indirect-holding model, meaning customers are not “holders” of the crypto tokens, such as USDC, but only “holders” of a “security entitlement” – a bundle of contractual rights against Coinbase. Under this structure,  Coinbase itself is the “holder” of the USDC, as it is the party that has possession and control of the underlying asset. Coinbase’s decision to use Article 8 therefore strongly supports the argument that USDC custodial balances belong, in a legal sense, to Coinbase, and that Coinbase is the “holder” for purposes of any statute that uses that term.

Coinbase’s Own Litigation Theory: Holding Private Keys = Holding the Asset

In its June 2023 lawsuit against Coinbase, the SEC charged the company with operating as an unregistered securities exchange, broker, and clearing agency, alleging that it facilitated trading in at least a dozen crypto asset securities without proper registration. The SEC also targeted Coinbase’s staking-as-a-service program, claiming it constituted an unregistered securities offering. Additionally, the agency alleged that Coinbase Wallet – Coinbase’s segregated self-custody product that is distinct from its usual custodial arrangement in which customer’s assets are held in omnibus accounts – functioned as an unregistered broker by routing orders and facilitating securities transactions through decentralized protocols.

In their motion to dismiss, Coinbase argued that their Wallet product is not a broker due in part to the fact that Wallet does not “hold customer assets or funds.” In their motion, Coinbase describes Wallet as “just passive software – in the form of a mobile application or browser extension – that allows customers to store the private keys for their own digital assets on their own computers or mobile devices.”

In March 2024, Judge Katherine Polk Failla largely denied Coinbase’s motion to dismiss the SEC’s lawsuit, allowing most of the SEC’s claims to proceed – including those related to Coinbase’s exchange, broker, clearing agency, and staking services. However, she dismissed the SEC’s claim regarding Coinbase Wallet, noting that “Coinbase does not maintain custody over the crypto-assets traded through Wallet” and that “the assets held through Wallet are self-custodied” (The SEC dismissed the case in February).

Coinbase’ claim that it is not the holder of customer assets when it does not control their private keys necessarily implies the opposite: When Coinbase does possess the private keys – as is the case with Coinbase-hosted (custodial) wallets as opposed to the self-custody Wallet product – it is, in fact, the holder of the customer assets.

Coinbase cannot simultaneously maintain in litigation that only the holder of the private key controls the asset, while denying that its own custodial service makes Coinbase the holder. Therefore, Coinbase is the “holder” of USDC in Coinbase-hosted wallets.

FinCEN’s 2019 Guidance: Hosted Wallet Providers as Controllers of Customer Assets

The view that control of private keys defines holder status is consistent with federal regulatory guidance, which identifies custodial wallet providers – not end users – mas the entities exercising legal control over crypto assets. For example, in 2019 guidance, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) defined hosted wallet providers as entities that:

1. “receive, store, and transmit” virtual currency,
2. “on behalf of their accountholders,”
3. where “the host has total independent control over the value” – i.e., over the private keys.

FinCEN explicitly states that “[i]n this business model, the money transmitter is the host, the account is the wallet, and the accountholder is the wallet owner.”

This framework makes clear that, for custodial wallets, the hosted wallet provider is the party with control over the asset, subject to a contractual obligation to act on user instruction – what would commonly be thought of as a holder. The crypto industry has largely embraced this interpretation.[3]

Application to the GENIUS Act

Once Coinbase is understood to be the holder, Circle’s payments to Coinbase cannot avoid Section 4(a)(11)’s prohibition. Circle’s S-1 explains that the payment base is derived from daily reserve income – i.e., interest earned on the assets backing USDC. Circle and Coinbase then divide this interest income. This constitutes a yield, regardless of nomenclature.

Because Coinbase customers can only earn “rewards” by keeping their USDC in a Coinbase-hosted wallet, and Coinbase is legally the holder of USDC in custodial wallets, Circle is paying yield to the holder of the stablecoin.

This structure maps directly onto the statutory prohibition. Circle, a permitted stablecoin issuer, is paying interest or yield to the holder of its stablecoin solely based on the amount of the stablecoin held.

Counterarguments and Their Weaknesses

Coinbase’s website states that “USDC Rewards is a loyalty program funded by Coinbase.” This language implies that the “rewards” Coinbase’s customers receive is independent of whatever payment Coinbase receives from Circle or anyone else. Even if accurate, that argument is irrelevant. GENIUS regulates issuer payments to holders, not third-party promotional payments. The operative transaction is Circle paying Coinbase, not Coinbase paying retail customers.

Alternatively, if the customers are in fact the holders, then Circle’s arrangement with Coinbase could be viewed as an integrated transaction in which Circle is paying rewards to Coinbase customers through Coinbase, with Coinbase collecting a fee for its services. The fact that Coinbase does not generally offer such loyalty rewards on other crypto assets is strong evidence that the true nature of the arrangement is to attract investment in USDC by offering yield through the subterfuge that the yield is not from Circle, but from Coinbase.

Coinbase also offers a USDC lending feature via the Morpho protocol, which is distinct from the passive USDC rewards program. Customers must opt in and use a self-custodial wallet to participate. Lending rewards are funded by borrower interest and paid in USDC, Morpho tokens, or other assets. The fact that Coinbase explicitly states that the USDC lending feature is only accessible through a self-custodial wallet is a tacit acknowledgement that passive USDC rewards are earned through custodial wallets.

Finally, Circle or Coinbase may assert that customers remain the “beneficial” or “economic” owners of USDC. Indeed, Section 2.7.1 of the Coinbase User Agreement states, “Title to Supported Digital Assets shall at all times remain with you and shall not transfer to Coinbase.” But GENIUS, which was passed against the background of the well-established use of UCC terms, uses the term “holder,” not “title holder” or “beneficial owner.” Congress chose a possession-and-control-based term, not one tied to economic ownership. And under the custody structure that Coinbase itself adopts in Section 2.7.2 – treating customer assets as “financial assets” in a “securities account” held by a “securities intermediary” – beneficial ownership and holder status diverge by operation of law. In the Article 8 indirect holding system, the intermediary is the legal holder of the asset, while the customer merely has a “security entitlement.” Thus, even if customers retain economic title, Coinbase, as the custodian and securities intermediary, is the holder for purposes of any statute – like GENIUS – that turns on who holds the asset.

Conclusion

The GENIUS Act’s prohibition on interest payments to stablecoin holders is broad. Circle’s S-1 reveals that Circle pays Coinbase a share of reserve interest based strictly on the amount of USDC Coinbase holds in its custodial wallets. Under traditional custodial principles, FinCEN guidance, Coinbase’s own arguments in federal court, and the explicit Article 8 custodial framework adopted in Coinbase’s User Agreement, Coinbase is the “holder” of that USDC. Circle is therefore paying interest to a holder for holding the stablecoin – exactly what Section 4(a)(11) forbids.

As a result, Circle’s distribution arrangement with Coinbase presents a clear statutory conflict under the GENIUS Act and may require regulatory correction, legislative clarification, or fundamental restructuring of custodial stablecoin economics. However, even if Circle is presently violating Section 4(a)(11) of the GENIUS Act, it is not entirely clear which federal agency – if any – could bring an enforcement action at this stage. The GENIUS Act does not take effect until January 2027, or earlier if final implementing regulations are issued. For now, Circle operates under state money transmitter licenses, and those state regulators are not authorized to enforce the GENIUS Act. In June, however, Circle submitted an application to the Office of the Comptroller of the Currency (OCC) to establish a national trust bank. If Circle continues paying interest to Coinbase in violation of Section 4(a)(11), that conduct could theoretically provide grounds for the OCC to deny its charter application, though there is no indication the agency intends to do so. Since GENIUS became law, several stablecoin issuers and prospective issuers have filed national trust bank applications, sparking a broader debate over whether national trust banks may engage in non-fiduciary activities. The OCC has yet to rule on these applications, but Comptroller Gould recently signaled openness to approving them, noting that they did not raise concerns “in a general way.”

Still, unless regulators act with greater clarity and consistency, the GENIUS Act’s core protections risk being undermined before they even take effect. Without meaningful oversight, distribution arrangements like Circle’s will likely persist – testing the limits of the statutory framework and potentially eroding the act’s foundational policy goals.

ENDNOTES

[1] UCC § 8-501(c)-(d).

[2] UCC § 8-102(a)(9)(iii) (allowing contractual election for treatment of assets as “financial assets” under UCC Article 8).

[3] See, e.g., The Blockchain Association, Comment Letter on Docket No. FINCEN-2021-008 (Dec. 2021), available at https://theblockchainassociation.org/the-blockchain-associations-response-to-docket-number-fincen-2021-0008/

Lee Reiners is a Lecturing Fellow at Duke University