The Great Stablecoin Identity Crisis: When Payment Tools Want to Pay Interest

The crypto industry faces a fundamental question that could reshape how stablecoins are regulated—and whether they can continue to operate as freely as they have until now. PNC Bank CEO Bill Demchak recently articulated what many traditional financial institutions have been thinking: stablecoins trying to both function as payment mechanisms and pay interest have created a regulatory nightmare that mirrors how money market funds operate, yet avoids the same oversight.

The core tension is surprisingly simple. When stablecoins are originally marketed and positioned as payment infrastructure—a way to move value efficiently—they exist in one regulatory category. But the moment they begin to pay interest, they fundamentally transform into something else: investment products that resemble government money market funds. Yet crypto firms want to market them as both simultaneously, which traditional finance would never be allowed to do without exhaustive regulatory approval.

The Two-Face Problem: Why Marketing Can’t Solve This

Demchak’s frustration isn’t arbitrary. During PNC’s recent fourth-quarter earnings call, he highlighted the exact terminology battle now playing out in Washington. The GENIUS Act originally banned stablecoins from paying interest, but the Clarity Act is trying to fix language around whether “rewards” count as forbidden “interest.” It sounds like semantic wordplay, but the implications are enormous.

“If they actually want to pay interest on it, then they ought to go through the same process,” Demchak stated bluntly. The “process” he’s referring to is the rigorous regulatory framework that governs traditional investment products—something that would require stablecoin issuers to operate under banking rules or register as fund managers.

The challenge for the crypto industry is that once a stablecoin begins to pay yield, it stops being just a payment tool. It becomes an investment vehicle attracting deposits not for transactional purposes, but for returns. That shift shouldn’t happen without formal regulatory clearance, Demchak argues, but many crypto firms seem to want that loophole.

Why Banks Are Drawing a Hard Line

What’s emerged is a clear bifurcation in thinking between traditional finance and the crypto industry. Banks are essentially saying: choose your path. “If you want to be a money market fund, go ahead and be a money market fund,” Demchak explained. “If you want to be a payment mechanism, be a payment mechanism. But money market funds shouldn’t be payment mechanisms, and you should pay proper interest” within the regulatory framework.

This isn’t just PNC speaking in isolation. The entire banking sector is signaling that stablecoins wanting to pay competitive returns must accept the same regulatory burden—compliance costs, capital requirements, and transparency standards—that traditional financial institutions face when managing deposits or offering yields.

The Legislative Standoff Intensifies

The policy debate has reached a critical juncture. The Senate Banking Committee recently postponed a markup of market structure legislation after Coinbase withdrew its support, citing provisions that could harm consumer protection and competition. This pullback signals how contentious these issues have become even among industry players.

Lawmakers are still working through what a reasonable middle ground might look like. Some suggest creating a separate regulatory pathway for interest-bearing stablecoins that’s lighter than full banking regulation but more rigorous than current rules. Others argue there’s no middle ground—stablecoins either qualify as payment systems or investment products, and regulators should treat them accordingly.

The Lobbying Factor

Demchak also acknowledged the political dimension: “The crypto industry has a lot of lobbying power to say, no, we want it all.” That desire to maintain optionality—keeping stablecoins in a regulatory gray zone where they can simultaneously serve both payment and investment functions—is understandable from a business perspective. It maximizes market opportunity and revenue potential.

But as traditional finance continues to push back, that strategy may no longer be viable. The debate ultimately hinges on whether regulators will allow stablecoins to operate as hybrid instruments or force them to specialize. And if specialization becomes mandatory, many stablecoin projects face difficult decisions about whether their business model survives under pure payment-focused or regulated investment-product constraints.

PNC’s own crypto moves illustrate this tension. The bank explored blockchain-based infrastructure with Coinbase back in 2021, focusing on institutional adoption of digital assets without extending into retail crypto products. That measured approach—integrating blockchain without abandoning traditional safeguards—may signal how mainstream finance ultimately reconciles with the sector.