A new BIS Bulletin identifies two distinct models of stablecoin remuneration on centralized exchanges, each with very different risk profiles for holders. The taxonomy is timely. Interest prohibitions already in force in the EU and now taking shape in the US primarily target the model that carries less risk for holders.
Under “reserve-based” remuneration, the exchange passes through part of the return on a stablecoin’s reserve assets to holders. Coinbase implements this for USDC. BIS data shows the Coinbase USDC yield has tracked the federal funds rate closely since 2023, behaving much like a cash management instrument.
Under “activity-based” remuneration, the exchange deploys customer stablecoins into its own lending and trading operations, sharing part of the revenue. Binance is the prominent example. During the crypto rallies of early and late 2024, USDT borrowing rates on Binance rose to 40-50% and the holding yield exceeded 20%. The BIS paper’s statistical analysis confirms that crypto market activity, not benchmark interest rates, is the dominant driver of these yields.
The risk to holders, which the BIS paper flags without fully exploring, lies in what happens to their stablecoins. Under the reserve-based model, the coins sit idle in custody while the issuer’s reserves generate income. Under the activity-based model, the exchange takes customer funds and redeploys them. Binance’s Simple Earn terms state that customer assets are commingled and may be used for “loans to other clients” at Binance’s “sole discretion.” The BIS paper notes activity-based yields may embed compensation for counterparty risk because exchanges, unlike traditional securities intermediaries, do not segregate clients’ funds. Gemini Earn users experienced this firsthand, spending more than a year as creditors of the collapsed Genesis before eventually being made whole.
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