Crypto ETFs Expand to Include Yield-Bearing Stablecoins

Crypto ETFs have evolved significantly since the introduction of the first Bitcoin futures ETF less than four years ago. In early 2024, spot Bitcoin ETFs entered the US markets, attracting billions in capital inflows. The landscape now includes a variety of products, from futures-based ETFs to spot ETFs for BTC and ETH, reflecting a growing demand for broader crypto exposure. Recent filings for ETFs representing assets like XRP, AVAX, APTOS, SUI, and memecoins such as PENGU or DOGE have raised questions about the strategy and intent behind these moves. Some companies, like Ripple and Avalanche, have strong ecosystems and long-term commitments, while others, like Dogecoin or Pudgy Penguins, are driven more by community hype than fundamentals.

One of the key drivers behind institutions filing for such ETFs is the opportunity to capitalize on the current regulatory environment. As the SEC begins to approve more crypto ETFs, issuers are rushing to launch instruments that have the potential to gain traction beyond the crypto space. Diversification is another important factor, ensuring a broad spectrum of risk-reward profiles for different client segments. However, these filings could also be strategic plays aimed at increasing brand visibility rather than indicating product readiness in traditional finance. In contrast, stablecoins have already found their product-market fit and are grounded in utility, spanning the entire blockchain industry, not just the DeFi sector.

Stablecoins like USDC and USDT play a significant role in the cryptocurrency market, providing liquidity and price stability, often serving as on- and off-ramps. There is a growing movement away from vanilla stablecoins to yield-bearing stablecoins, which have surged to an 11 billion market size, constituting a 4.5% market share. The CEO of Pheonix Labs, Sam MacPherson, highlighted the need to "grow the pie of DeFi" with ETFs as an instrument to secure inflows into digital assets. In the case of an interest-generating stablecoin ETF, it could provide exposure to DeFi-native strategies by providing liquidity to high-yielding positions.

Yield-bearing stablecoins can be categorized based on their mechanisms for generating returns. T-bill-backed stablecoins, such as USDY from Ondo Finance, derive their yield from short-term U.S. Treasury bills, functioning like tokenized money market funds. Mixed yield source stablecoins, like USDS from Sky Ecosystem, blend returns from various sources, including staking and lending. Arbitrage-based stablecoins, like USDe from Ethena, rely on sophisticated trading strategies to find inefficiencies between derivatives and spot markets. Finally, debt-backed stablecoins, like crvUSD from Curve, are minted against collateral and earn yield through lending protocols. These dynamic and DeFi-native models are more likely to be wrapped by an ETF compared to RWA-backed models.

Wrapping an interest-bearing token in an ETF offers a compelling middle ground, providing neither the volatility of BTC or ETH nor the near-zero return of cash or vanilla stablecoins. This ETF would turn stablecoins into a more formalized, yield-generating asset class for traditional finance. As spot crypto ETFs mature, investors are actively seeking risk premiums with greater stability. In a market where crypto narratives evolve quickly, a yield-bearing stablecoin ETF could be the next wave, offering crypto-originated income that is not purely speculative. However, regulatory challenges, including the Stablecoin Act, which suggested banning yield-bearing stablecoins, will create friction for such an ETF. This could lead to more structure in this sector of digital assets or allow other jurisdictions to capture investor appetite. While the idea of a yield-bearing stablecoin ETF is intriguing, the regulatory aspect will ultimately determine its success.