When PayPal joined the stablecoin wars in August 2023 with its dollar-backed PYUSD, the crypto industry celebrated the entrance of a TradFi company into a competitive arena dominated by crypto-native firms Tether and Circle. But a year after its launch, PYUSD is still lagging behind its competitors with a market capitalization of less than $1 billion, paling in comparison to Tether's $117 billion.
In a bid to increase adoption, PayPal is partnering with Anchorage Digital—the only U.S. crypto firm to hold a federal bank charter—to offer rewards to Anchorage Digital's user base of accredited investors who hold PYUSD at its U.S. bank, its Singapore subsidiary, or by means of its noncustodial wallet Porto.
But the launch of the program also raises questions about the regulatory uncertainty around stablecoin interest payments, as the growing asset class remains a jump ball between different U.S. agencies and Congress drags its feet on passing legislation.
Anchorage Digital insists that PYUSD and the rewards program do not constitute a securities offering nor fall under the jurisdiction of banking regulators. Still, the product is charting new territory. "This is the first time a bank is getting involved in the crypto rewards slash interest ecosystem, and that's really new," said Todd Phillips, a banking and administrative law professor at Georgia State University, in an interview with Fortune.
After publication, a representative from Anchorage Digital reiterated that while Anchorage Digital Bank customers are eligible for the rewards program, the program itself does not originate from Anchorage Digital's banking arm, but instead from a separate Caymans-based subsidiary.
The fine print
While stablecoins can be tied to any underlying asset, such as the euro or precious metals, it is U.S.-dollar-backed products like Tether and USDC that have exploded in popularity over the past few years. Tether has found success targeting investors outside the U.S. who want to hold dollar-pegged assets, while USDC issuer Circle has focused on crypto app users who want to transact with a stablecurrency.
In the current era of higher interest rates, the assets that back the stablecoins—typically U.S. Treasuries and similar instruments—have yielded massive profits for their issuers that, for the most part, have not been passed on to holders. This is in part due to the absence of clear regulatory rules around stablecoins, which has made U.S.-based companies wary of offering interest payments. Some yield-bearing stablecoin projects, such as Mountain Protocol, explicitly operate outside the U.S., despite offering dollar-backed products.
The regulatory position of stablecoins remains hazy. While the Securities and Exchange Commission has taken the stance that some stablecoins, including TerraUSD and Binance's BUSD, are securities, federal courts have not always agreed with this conclusion. In July, the SEC dropped its investigation into BUSD issuer Paxos, which also issues PYUSD.
Even before the SEC's legal setbacks, Coinbase took the bold step of offering rewards on USDC, including to retail customers, though it labels the program as a marketing expense in its own accounting.
In an interview with Fortune, Anchorage Digital cofounder and CEO Nathan McCauley said that the rewards for PYUSD will explicitly originate from the yields on the underlying holdings, not a marketing expense.
So why does it fall outside the oversight of the SEC? And more crucially, what makes it different than a savings account at a bank?
Anchorage Digital argues that its rewards program does not constitute a securities offering. Still, because its products, such as bank custody and its noncustodial wallet, are only available to institutional investors, McCauley said that if the SEC objected, Anchorage Digital would take the position that it qualifies for a type of exemption—known as Reg D—that allows companies to sell securities to accredited investors without having to register with the SEC.
The banking question is more complicated. While Anchorage Digital Bank customers will be eligible for the rewards program if they custody PYUSD, the rewards program will legally not come from the bank. Instead, it will be paid out from a Caymans-based entity called Anchorage Digital Neo. In legal fine print, the parent company argues that this means the program is "not subject to regulatory oversight in the Cayman Islands or any other jurisdiction."
It's a familiar playbook of corporate obfuscation used in the U.S. crypto industry, which still lacks guardrails but continues to push the boundaries with regulators. While many firms fight for legislation, the PYUSD rewards will still operate without the traditional protections of similar banking products, like FDIC insurance for savings accounts.
"This is like a semi-regulated bank account," said Phillips. "It's a little bit better than holding your crypto on Coinbase, but not much."
After publication, an Anchorage Digital spokesperson emphasized that Anchorage Digital Bank doesn't need FDIC insurance because it is not allowed to touch customer deposits—including with the PYUSD rewards program. The lack of rehypothecation removes the risk of bank runs.
PayPal continues to diversify its products, including the checkout tool Fastlane, which has contributed to a recent rally in PayPal's share price.
McCauley argued that the new program will help institutional investors who want to hold PYUSD but still want to take advantage of the lucrative interest rate environment. "Ultimately the goal here is to improve stablecoin adoption," he told Fortune.
