Coinbase Global Inc. (COIN) CEO Brian Armstrong is sounding the alarm about America's approach to digital currency, and his timing is interesting. While U.S. policymakers debate whether stablecoins should offer yield payments, China just went ahead and started paying interest on its central bank digital currency.

Why Armstrong Is Worried

In a post on X this Wednesday, Armstrong argued that China's decision to pay interest on the Digital Yuan hands them a clear "competitive advantage" in the global digital currency race. His message to American policymakers was blunt: restricting rewards on stablecoins means the U.S. is "missing the forest through the trees."

"Rewards [or even paying interest] benefits ordinary people just like community lending does. We have to let the market do both," Armstrong said. The implication is clear. If China offers attractive features on its digital currency while the U.S. hamstrings its own alternatives, guess which one looks more appealing to users worldwide?

What Changed in China

Armstrong's concerns aren't hypothetical anymore. Starting January 1, Chinese commercial banks began paying interest on holdings of the country's central bank digital currency, according to Reuters. The yield is proportional to how much digital yuan clients hold, creating a direct incentive for adoption.

Now, there's an important distinction here. Central bank digital currencies like China's Digital Yuan work differently from stablecoins like Tether (USDT) and USDC (USDC). CBDCs are controlled by a central authority, and their blockchain can only be viewed and accessed by select financial institutions. Stablecoins, by contrast, operate on more open networks.

The Political Stalemate

Here's where things get complicated for the U.S. cryptocurrency industry. Yield payments on stablecoins have become a major sticking point in efforts to pass comprehensive cryptocurrency market structure legislation, exactly the kind of regulatory framework that industry leaders like Armstrong have been pushing for.

Democrats have raised concerns that allowing interest or yield payments on stablecoin balances could siphon deposits away from the traditional banking system. Their particular worry centers on community banks, which could lose customers to more attractive stablecoin alternatives offering competitive returns.

Armstrong's comments landed at an interesting moment. World Liberty Financial, a business linked to the Trump family, recently applied for a national banking license to issue and custody its dollar-pegged stablecoin called World Liberty Financial USD (USD1). The application highlights how the stablecoin landscape continues evolving even as Congress wrestles with how to regulate it.

What It Means for Coinbase

The broader debate has direct implications for Coinbase, which would benefit from clearer regulations that allow stablecoins to compete more effectively. The company's shares gained 0.19% in after-hours trading Wednesday after closing 1.85% lower at $245.93 during the regular session. Over the past year, the stock has declined 5.42%.

Armstrong's central argument comes down to this: if the U.S. restricts what dollar-pegged stablecoins can do while China enhances what its digital currency offers, America risks losing ground in a technology race with genuine geopolitical implications. Whether policymakers agree remains to be seen.