GENIUS Act Banned Stablecoin Yields Amid TradFi Tokenization Push

The U.S. GENIUS Act, signed into law by President Donald Trump on July 18, has drawn growing scrutiny for its explicit prohibition on yield-bearing stablecoins, a move seen by many as favoring traditional financial institutions over the digital asset industry. The legislation, intended to stabilize the market and mitigate risks associated with crypto assets, now faces criticism for potentially stifling innovation in the rapidly evolving tokenization landscape [1]. The ban prevents stablecoin issuers from offering interest to both retail and institutional investors, a feature that has historically made stablecoins a compelling alternative to traditional financial instruments [2].

Industry leaders have raised concerns over the implications of this restriction. Temujin Louie, CEO of cross-chain interoperability protocol Wanchain, noted that while the act may represent a step forward for stablecoin adoption in some respects, it also undermines one of their key advantages: the ability to generate yield. According to Louie, this provision effectively shields the competitive edge of money market funds (MMFs), which have long provided interest on cash balances [3].

Tokenized MMFs are increasingly being viewed as a viable alternative to stablecoins, particularly in light of their potential for programmability, faster transactions, and broader use cases such as margin collateral. Teresa Ho, a JPMorgan strategist, highlighted that tokenized MMFs could replicate the speed and flexibility of stablecoins while maintaining regulatory oversight and safety [4]. Paul Brody of EY echoed this sentiment, stating that tokenized MMFs may find a new niche onchain, especially now that stablecoins are unable to offer returns [5].

However, stablecoins still hold unique advantages, particularly in the decentralized finance (DeFi) ecosystem. Unlike tokenized MMFs, stablecoins can function as bearer assets, allowing seamless integration into DeFi platforms and other onchain services without the need for complex access and transfer controls. Brody acknowledged that while yield could be a decisive factor for investors, these added restrictions on tokenized MMFs might diminish their appeal compared to stablecoins [6].

The influence of the traditional banking sector in shaping the legislation has not gone unnoticed. Reports suggest that the banking industry has actively lobbied against yield-bearing stablecoins to protect their existing business models. Austin Campbell, a blockchain consultant and NYU professor, cited internal banking sources indicating that institutions feared losing ground to stablecoin issuers who could offer higher returns to depositors [7]. This lobbying effort appears to have left its mark on the final form of the GENIUS Act, which now bars stablecoins from competing directly with MMFs on yield.

Despite the restrictions, yield-bearing digital assets are not entirely absent from the U.S. financial landscape. In February, the Securities and Exchange Commission approved YLDS, a yield-bearing stablecoin issued by Figure Markets, which offered a 3.85% yield at launch. The existence of such products under securities regulation highlights the potential for a hybrid model that balances innovation with compliance [8].

As tokenization gains momentum across traditional finance, the debate over the GENIUS Act underscores the tension between regulatory caution and technological advancement. While the act aims to address risks, critics argue that it could inadvertently slow the development of tokenized financial products and push activity toward less transparent markets. The legislation now serves as a pivotal moment for both stablecoin innovators and traditional financial players, as the sector navigates the evolving legal and competitive landscape [9].

[1] GENIUS Act scrutinized for stablecoin yield ban as TradFi tokenization gains steam (https://cointelegraph.com/news/genius-act-scrutinized-stablecoin-yield-ban-tradfi-tokenization)

[2] GENIUS Act scrutinized for stablecoin yield ban as ... (https://mx.advfn.com/bolsa-de-valores/COIN/AMPUSD/crypto-news/96559055/genius-act-scrutinized-for-stablecoin-yield-ban-as)

[3] GENIUS Act scrutinized for stablecoin yield ban as TradFi tokenization ... (https://www.coingecko.com/en/coins/moondoge)