Stablecoin Competition: The GENIUS Act vs. China's Interest-Bearing Digital Yuan

The strategic competition over digital money is entering a decisive phase, with the United States and China setting fundamentally different rules for the future of global finance. The U.S. has established a high-compliance, dollar-centric framework through the ), signed into law in July 2025. This legislation creates the first federal regulatory structure for dollar-pegged stablecoins, mandating a 1:1 reserve backing with high-quality liquid assets and imposing strict anti-money laundering requirements. Its core aim is to cement the U.S. dollar's dominance in the digital realm by providing a secure, regulated settlement layer.

Yet this very strength may contain a critical vulnerability. The GENIUS Act explicitly bars U.S. dollar stablecoin issuers from paying interest or yield to holders. This prohibition, designed to keep stablecoins focused on payments rather than savings, risks ceding a key competitive advantage to China. Starting January 1, 2026, the People's Bank of China will allow commercial banks to pay interest on clients' digital yuan holdings. This move will transform China's central bank digital currency () from simple "digital cash" into a true "digital deposit currency," directly competing with interest-bearing savings accounts and potentially attracting capital seeking yield.

The stakes are high because the stablecoin market itself is a critical battleground for monetary sovereignty. It has grown explosively, surging , driven by the very regulatory clarity the GENIUS Act provides. For the U.S., the law is a strategic tool to extend dollar dominance. For China, the interest-bearing digital yuan is a direct counter-offensive, designed to boost adoption and challenge the dollar's global role. The coming year will test whether the U.S. can maintain its lead through regulatory rigor or if China's innovation in financial incentives will prove a more powerful magnet for global capital.

The Competitive Mechanism: Yield as a Strategic Lever

The GENIUS Act's prohibition on interest-bearing stablecoins is creating a tangible competitive disadvantage for U.S. digital assets. While the law bars issuers from paying yield, a loophole is being exploited by exchanges and affiliates that offer reward-like incentives. This practice risks disintermediating core banking activity, as consumer deposits are drawn away from FDIC-insured accounts into unregulated platforms. The American Bankers Association warns this "loophole" undermines the economic role banks play by impairing their ability to lend, ultimately making credit more expensive for small businesses and families. In essence, the U.S. is creating a regulatory mismatch where unregulated platforms can offer higher returns through riskier strategies, forcing banks to compete on a tilted field.

China is moving to exploit this gap directly. Starting January 1, 2026, commercial banks in China will be allowed to pay interest on clients' holdings of the digital yuan (e-CNY). This policy shift redefines the e-CNY from digital cash to "digital deposit currency," directly competing for user holdings with non-yielding U.S. alternatives. For Beijing, it's a strategic lever to boost adoption of its central bank digital currency, which has struggled to gain widespread traction despite years of pilot programs. The move gives China's CBDC a clear incentive advantage, potentially drawing capital and user activity away from U.S. dollar-pegged tokens.

This competitive pressure is already manifesting in the market. Major non-U.S. stablecoins are gaining significant traction, signaling growing institutional demand for alternatives. , for instance, has surpassed , with use cases expanding in institutional settlement and cross-border payments. This growth indicates that global financial participants are actively seeking out stablecoin solutions that are not constrained by the U.S. interest ban. As Coinbase CEO Brian Armstrong noted, U.S. stablecoins must remain globally competitive, and the GENIUS Act's current framework risks ceding that edge to foreign rivals.

The bottom line is that yield is becoming a critical strategic lever in the global race for digital money. By prohibiting interest, the U.S. is creating a structural headwind against a Chinese CBDC that is explicitly designed to offer it. The market is responding by moving capital toward alternatives that can offer yield, whether through regulatory loopholes or foreign jurisdictions. For the U.S. to maintain the primacy of its digital dollar, it will need to reconcile its regulatory vision with the competitive realities of a global financial system where returns matter.

Stakeholder Impact and Financial System Risks

The regulatory divergence over stablecoins is creating a direct and material risk to the U.S. financial system's stability. The core tension is between a new, unregulated digital payments ecosystem and the traditional banking model that funds the real economy. U.S. banks are sounding the alarm that unchecked yield programs could disintermediating core banking activity, impairing their ability to lend and raising credit costs for businesses and consumers. The and 52 state banking associations have jointly warned that exchanges exploiting a loophole to offer yield-like incentives on stablecoins "risks disintermediating core banking activity, including deposit taking and lending, which harms local communities." This is not a theoretical concern; it is a direct threat to the flow of credit that powers Main Street.

The scale of the potential deposit flight is staggering. The Treasury Department estimates that stablecoins could lead to as much as , a risk that is amplified by the interest loophole. When exchanges offer high returns funded by speculative strategies rather than regulated lending, they create a powerful incentive for consumers to move funds from FDIC-insured bank accounts into products that lack federal safety nets. This shift reduces the pool of capital available for banks to lend, forcing them to compete by raising deposit rates. The bottom line is that higher funding costs for banks will be passed on to borrowers, making credit more expensive for small businesses, farmers, homebuyers, and students.

This regulatory gap is already fragmenting the market. The dominance of a few stablecoins is eroding, with USDT and USDC's combined market share dropping from . This fragmentation is a symptom of a competitive landscape where nonbank issuers and tech platforms are racing to offer yield-bearing alternatives, often through partnerships with exchanges. The GENIUS Act, while establishing a federal framework, has not closed this loophole, allowing for evasion and undermining its own intent. The result is a market structure where the primary purpose of a payment instrument is being subverted by investment-like returns, creating a systemic vulnerability.

The broader economic and financial system implications are profound. A sustained flight of deposits threatens the stability of the banking sector, particularly community banks that serve as critical lenders for small businesses and agriculture. It also risks undermining the dollar's global role by creating a parallel, unregulated financial layer that operates outside the traditional, heavily supervised banking system. For now, the U.S. approach is fostering a competitive but unstable environment. The coming years will test whether regulators can close the loophole to protect the credit pipeline, or if the financial system will absorb the costs of a disintermediated payments landscape.

Catalysts, Scenarios, and What to Watch

The strategic competition between U.S. and Chinese digital finance is entering a decisive phase, with near-term regulatory and market developments acting as the primary catalysts. The outcome will hinge on whether U.S. lawmakers close a critical loophole and how China's new interest-bearing e-CNY gains traction.

The first major regulatory milestone is the FDIC's final rule on the GENIUS Act application process. The FDIC issued a notice of proposed rulemaking on December 16, 2025, and comments are due by February 17, 2026. This is the first implementing rule for the Act, which establishes a federal framework for payment stablecoin issuance. The broader implementation timeline is tight, with the GENIUS Act requiring all primary federal payment stablecoin regulators to issue final regulations by , . This deadline is a hard constraint; , . The FDIC's proposed process aims to minimize burden by leveraging existing supervisory information, but the final rule will set the precedent for how U.S. banks can enter the stablecoin market.

Simultaneously, China is making a direct move to boost adoption of its digital yuan. Starting , , the People's Bank of China will allow commercial banks to pay interest on holdings, transitioning it from "digital cash" to "digital deposit currency." This is a world-first and a clear strategic counter to the U.S. regulatory stance. The goal is to increase user willingness to adopt the currency and expand its usage scenarios. The initial adoption metrics from this launch will be a key early signal of the PBOC's ability to drive real-world usage beyond government agencies and state companies.

The critical catalyst, however, is the political and regulatory battle over yield in the U.S. The GENIUS Act bars U.S. dollar stablecoin issuers from paying interest, but a loophole exists for affiliated platforms. The American Bankers Association is pushing to close this gap, arguing that yield-like incentives on exchanges risk disintermediating core banking activity and threatening community lending. Crypto firms, represented by Coinbase's policy chief, warn that strict enforcement would hand a strategic advantage to global rivals. The debate is urgent: if U.S. lawmakers do not act to close the loophole, it could accelerate the shift of stablecoin issuance and user capital to more flexible, yield-competitive jurisdictions, undermining the U.S. financial system's primacy in digital settlement.

The bottom line is that 2026 will be a year of regulatory execution and competitive response. The FDIC's final rule and China's e-CNY interest launch are concrete events to watch. But the deeper strategic question-whether the U.S. can maintain its financial edge in a world where digital money pays interest-will be answered by the political will to close the yield loophole.