PayPal and Anchorage Digital Partner on Stablecoin Rewards Program

Payments giant PayPal and crypto custodian Anchorage Digital are partnering on a stablecoin rewards program. The program will pay out yield on PayPal USD (PYUSD) tokens held by the crypto-native bank or in Anchorage’s institutional self-custody wallet, Porto.

The companies are pitching the model as a way for users to earn money on PYUSD balances without having to stake, lend, or rehypothecate their funds. The stablecoins will remain fully segregated in their on-chain accounts, meaning Anchorage and PayPal are not loaning customers’ assets out to earn a return to pay for the program.

The launch of the rewards program, aimed toward Anchorage’s accredited institutional clients, comes amid a period of accelerating growth for PayPal’s branded stablecoin, which has yet to reach a $1 billion market capitalization a year after its release.

In August, the circulating supply of Solana-based PYUSD stablecoins caught up with the equivalent token on Ethereum. PayPal’s stablecoin also surpassed the Justin Sun-backed USDD to become the sixth-largest USD-dominated token by market capitalization, with a total supply that is up over 64% over the last 30 days.

Nathan McCauley, CEO of Anchorage, stated that the program, being the first of its kind, could accelerate the adoption of PYUSD. He said, “This program will help to increase institutional adoption of stablecoins and bridge the gap between traditional finance and the digital asset ecosystem.”

McCauley explained that the program will be funded by Anchorage Digital, with the yield generated from the underlying holdings. The specifics of how this will work remain unclear, though he emphasized there is “no rehypothecation, staking, or lending involved.”

For context, Coinbase treats its yield program for USDC stablecoins held on the exchange as a marketing line item on the company’s balance sheet. The rewards will be paid out in PYUSD, likely based on deposit size, with McCauley noting, “Rewards may vary.”

Legal Concerns

Anchorage is one of the most regulated institutions in the crypto sector. In 2021, the U.S. Office of the Comptroller of the Currency granted it the first and, so far, only federal charter to become a digital asset bank. While it has been willing to experiment with novel arrangements like staking, moving into stablecoins is something of a first.

The current regulatory picture for stablecoins is murky, with regulators like the U.S. Securities and Exchange Commission treating some assets as securities while calling for the Commodity Futures Trading Commission to oversee the asset class. Meanwhile, a bipartisan stablecoin bill appears to have stalled in Congress.

It’s conceivable that an agency like the SEC or a banking regulator like the OCC will view these interest-paying quasi-bank accounts as under their jurisdiction, either because they resemble securities offerings or could violate banking protections.

In an interview with Fortune, McCauley explained that there may be a loophole, as the program is only offered to accredited investors and might qualify for a Reg D exemption allowing companies to sell securities without registering. He further clarified that Anchorage is not directly paying the rewards; instead, a Cayman Islands-based entity called Anchorage Digital Neo is responsible for that.

Regardless, McCauley suggested that this might only be the beginning of Anchorage’s moves into the stablecoin space, expressing enthusiasm for launching their first stablecoin rewards program, allowing institutions to earn competitive rewards on eligible stablecoin balances held at Anchorage Digital, starting with PayPal USD.