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 +0.076% 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 onchain 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, pitched toward Anchorage’s accredited institutional clients, comes amid a period of accelerating growth for PayPal’s branded stablecoin, which has yet to crack 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 flipped the Justin Sun-backed USDD to become the sixth-largest USD-dominated token by market capitalization. Its total supply is up over 64% over the last 30 days. 

Nathan McCauley, CEO of Anchorage, said the program, as the first of its kind, could accelerate the adoption of PYUSD. 

“This program will help to increase institutional adoption of stablecoins and bridge the gap between traditional finance and the digital asset ecosystem,” he said in an email.

McCauley explained the program will be funded by Anchorage Digital, with the yield generated from the underlying holdings. How exactly that will work remains unclear, though McCauley reiterated that 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. “Rewards may vary,” McCauley said.

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

The current regulatory picture for stablecoins is murky at best, with regulators like the U.S. Securities and Exchange Commission treating some assets as securities while also calling for the Commodity Futures Trading Commission to have greater oversight over 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 regulatory like the OCC will see these interest-paying quasi-bank accounts as under their domain, either because they look like securities offerings or fall afoul of banking protections. 

In an interview with Fortune, however, McCauley explained that there may be a loophole as the program is only offered to accredited investors and, therefore, could qualify for a Reg D exemption that allows companies to sell securities without having to register. 

Further, he explained that Anchorage itself isn’t paying the yield; instead, a Caymans-based entity called Anchorage Digital Neo is doing so.  

In any case, McCauley seems to suspect this is only the beginning of its moves into the stablecoin space. 

“Anchorage Digital is excited to announce the launch of our first stablecoin rewards program, enabling institutions to earn competitive rewards on certain eligible stablecoin balances held at Anchorage Digital, starting with PayPal USD,” he told The Block. 

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