Both the Fed and issuers issue non-interest-bearing liabilities and earn interest by investing the money received. What changes is whether that interest returns to the Treasury. The blue on the left is the Fed in the cash era; the orange on the right is the stablecoin issuer. The example is a simplification assuming $100 is entirely in Treasury bonds, with an annual interest rate of 4%.
Step 1 · Issuing non-interest-bearing liabilities
Cash Era · The Fed
Issues Federal Reserve Notes (paper currency). There is no interest for note holders.
Federal Reserve Act Section 16 (12 U.S.C. § 411)Stablecoin · Issuer
Issues stablecoins. Must hold reserves equal to or greater than the issuance amount.
Clarity Act Section 4 (Reserve Requirements)Step 2 · Investing the received money
Cash Era · The Fed
Federal Reserve Banks buy and sell primarily U.S. Treasury bonds on the open market. Government-guaranteed bonds are also included.
Federal Reserve Act Section 14 (12 U.S.C. § 353 et seq.)Stablecoin · Issuer
Reserves are held in various assets, not just Treasury bonds. The total amount must be at least the issuance amount.
The allocation varies by issuer. Example: In 2023, Circle held about one-fourth of its reserves in bank cash.
Clarity Act Section 4 (Reserve Assets)Step 3 · The Treasury pays interest on Treasury bonds
Cash Era · Treasury → Fed
The Treasury pays interest on the Treasury bonds held by the Fed. If it is all Treasury bonds, it is $4.
31 U.S.C. § 3123(b) Payment of interest on public debt§§ 3102–3104, 3121 Issuance and interest ratesStablecoin · Treasury → Issuer
The Treasury pays interest only on the portion held in Treasury bonds. The portion held in bank deposits is managed by banks and is not interest paid directly by the Treasury.
31 U.S.C. § 3123(b) Payment of interest on public debt§§ 3102–3104, 3121 Issuance and interest ratesStep 4 · Can interest be paid to holders?
Cash Era · Note holders
Paper currency does not pay interest.
No separate provision identifiedStablecoin · Coin holders
Issuers cannot directly pay interest or profits to holders.
Clarity Act Section 4(a)(11)Rewards via exchanges are under debateStep 5 · Whose share is the interest eventually?
Cash Era · Result
The Fed sends profits, minus dividends and surplus, to the Treasury. Most of the $4 returns to the Treasury.
Federal Reserve Act Section 7 (12 U.S.C. § 289)Remittance of most net earnings is Board policyStablecoin · Result
The interest on the portion held in Treasury bonds is taken by the issuer and does not return to the Treasury. The portion held in deposits can be managed by banks in Treasury bonds or Fed reserves.
No Treasury return provision identifiedThe investment path for the deposit portion is an estimateThe provisions were verified using the original Federal Reserve Act on the Fed's website, the original Title 31 of the U.S. Code (Money and Finance), and Clarity Act commentaries (Congressional Research Service, etc.). The interest in Step 3 is an obligation the Treasury must pay by law, and the interest rate is set by the Secretary of the Treasury. The $4 in the example is a value assuming 100% Treasury bonds; actual reserves include a mix of bank deposits, so the portion of interest paid directly by the Treasury decreases accordingly. The details of Board policy (net earnings remittance since 1947) were not directly verified. There have been periods when the Fed's interest payments on bank reserves caused the profits sent to the Treasury to decrease or stop, so the cash era in Step 5 is a simplification of the typical structure.