The Regulatory and Market Risks of Yield-Bearing Stablecoins

The rise of yield-bearing stablecoins has redefined the intersection of decentralized finance (DeFi) and traditional financial systems, offering users a hybrid model of stability and passive income. By 2025, the market has expanded to over $11 billion in locked value, with projections suggesting it could reach $500–750 billion in the coming years. Protocols like Ethena's USDe and Ondo Finance's USDY have demonstrated the viability of delta-neutral strategies and tokenized real-world assets (RWAs), generating 4–5% annual percentage yields (APY) while maintaining pegs to the U.S. dollar. However, this rapid growth has introduced systemic risks and regulatory complexities that demand urgent attention from investors and policymakers alike.

Market Growth and Adoption Trends

Yield-bearing stablecoins have gained traction by addressing two core user needs: capital preservation and income generation. Unlike traditional stablecoins, which merely mirror fiat value, these instruments leverage DeFi mechanisms-such as lending, staking, and RWA tokenization-to generate returns. For instance, Ethena's USDe combines perpetual futures funding rates with liquid staking rewards to achieve sustainable yields without exposure to price volatility. Similarly, USDY tokenizes short-term U.S. Treasuries, offering institutional-grade safety while competing with traditional savings vehicles.

Adoption has extended beyond retail investors. JPMorgan's JPM Coin now enables corporations to sweep idle liquidity into tokenized T-bill stablecoins overnight, capturing yields without manual intervention. Meanwhile, real-world asset tokenization by institutions like Goldman Sachs and BNY Mellon has blurred the lines between crypto and traditional finance, further accelerating mainstream adoption. Regulatory clarity, such as the U.S. GENIUS Act of 2025, has also played a pivotal role in legitimizing these models.

Systemic Risks to Financial Stability

Despite their innovation, yield-bearing stablecoins pose significant risks to systemic financial stability. Central banks have warned that these instruments could displace traditional bank deposits, altering the liability structure of financial institutions and increasing liquidity risk. For example, if stablecoin issuers allocate reserves to non-deposit assets (e.g., tokenized Treasuries or DeFi pools), banks may face reduced funding sources, raising the cost of capital and limiting their ability to lend. The Federal Reserve estimates that a stablecoin-driven reduction in bank deposits could shrink lending capacity by up to $1.5 trillion-equivalent to over one-fifth of current consumer, small-business, and farm loans.

The risk of "stablecoin runs" further compounds these challenges. Unlike bank deposits, which are federally insured in many jurisdictions, yield-bearing stablecoins lack equivalent safeguards. A loss of confidence in a stablecoin's reserve backing or yield-generating mechanisms could trigger a rapid redemption wave, mirroring the dynamics of a bank run. This vulnerability is exacerbated by the absence of prudential oversight for cryptoasset service providers (CASPs), which often operate without capital requirements or transparency mandates.

Regulatory Responses and the GENIUS Act

The U.S. GENIUS Act, enacted in July 2025, represents a critical step toward addressing these risks. The legislation mandates that stablecoins be backed by safe assets and remain redeemable at a fixed dollar value, granting oversight authority to banking regulators like the Federal Reserve. However, gaps persist. Stablecoin issuers are exempt from traditional bank capital requirements, and the act does not extend FDIC insurance or central bank liquidity access to these instruments. Critics argue that this creates an uneven playing field, incentivizing consumers to treat stablecoins as investment vehicles rather than payment tools.

Globally, regulatory momentum has been uneven. The EU's Markets in Crypto-Assets (MiCA) Regulation has established a comprehensive framework for stablecoins, while jurisdictions like Japan and Hong Kong are still finalizing their approaches. The Financial Stability Board (FSB) has highlighted significant inconsistencies in implementation, warning that fragmented oversight increases the risk of regulatory arbitrage and cross-border instability.

Global Regulatory Evolution and Challenges

The systemic risks of yield-bearing stablecoins are not confined to national borders. The Bank for International Settlements (BIS) has raised concerns about their impact on monetary sovereignty and seigniorage income, particularly in cross-border payments. If unregulated stablecoins dominate global transactions, central banks could lose control over monetary policy.

Academic analyses underscore the need for a unified regulatory framework that addresses both stablecoin issuers and CASPs. Such a framework would require harmonizing technical standards, closing consumer protection gaps, and ensuring that yield-bearing stablecoins operate under the same prudential safeguards as traditional financial instruments. However, achieving this remains challenging, as market dynamics evolve faster than regulatory processes.

Conclusion

Yield-bearing stablecoins represent a transformative force in finance, offering unprecedented opportunities for yield generation and financial inclusion. Yet, their systemic risks-ranging from liquidity vulnerabilities to regulatory arbitrage-demand a coordinated global response. Investors must weigh the potential rewards against the fragility of these instruments, particularly in scenarios of market stress. For regulators, the challenge lies in balancing innovation with stability, ensuring that the next generation of stablecoins does not destabilize the very systems they aim to enhance.