GENIUS Act Bans Yield-Bearing Stablecoins, Boosts DeFi

The GENIUS Act, which stands for the "Guiding and Establishing National Innovation for U.S. Stablecoins Act," has introduced a significant clause aimed at preventing technology giants and major financial institutions from dominating the stablecoin market. According to Circle Chief Strategy Officer Dante Disparte, this clause, referred to as the "Libra clause," mandates that any non-bank entity issuing a dollar-pegged token must establish a standalone entity. This entity must clear antitrust hurdles and face a Treasury Department committee with veto power over the launch. Additionally, banks issuing stablecoins must house them in a legally separate subsidiary, maintaining a balance sheet with no risk-taking, no leverage, and no lending. This structure is even more conservative than the deposit-token models proposed by institutions like JPMorgan, ensuring clear rules that benefit U.S. consumers, market participants, and the dollar itself.

The GENIUS Act, passed with bipartisan support, including more than 300 House votes and backing from 102 Democrats, provides the dollar with "rules-based" firepower in the global digital-currency race. The act legitimizes the cryptocurrency industry by offering a path for legal and regulatory clarity in the United States, allowing it to compete on a global scale. The bill preserves state money-transmitter laws for issuers under a $10 billion threshold but requires a national trust-bank charter once assets exceed that level. Notably, the law bans interest-bearing stablecoins, enforces rigorous disclosure standards, and introduces criminal penalties for unbacked "stable" tokens, effectively ending Terra-style experiments. Critics argue that the ban on yield could hinder consumer adoption and advantage overseas issuers, but Disparte contends that yield is a secondary-market innovation better delivered by decentralized finance protocols once the base layer is secure.

The GENIUS Act's ban on yield-bearing stablecoins could redirect investor demand toward Ethereum-based decentralized finance (DeFi) platforms. With no interest incentives left in stablecoins, DeFi becomes the primary option for generating passive income onchain. This shift is particularly significant for institutional investors, who have fiduciary duties to generate returns, making yield opportunities essential. Analysts suggest this could lead to a surge in institutional capital flowing into DeFi, particularly on Ethereum, which dominates the total value locked in the sector. This regulatory change is expected to foster a more stable and trustworthy environment for users and investors, promoting innovation while safeguarding consumer interests. The act's provisions ensure that stablecoins are backed by reserve assets, providing a stable store of value and facilitating seamless transactions. As the stablecoin market continues to evolve, the GENIUS Act will play a crucial role in shaping its future, promoting a competitive and fair ecosystem for all participants.