The Stablecoin Rewards Debate: A Critical Inflection Point for Crypto Valuations

The stablecoin sector has reached a pivotal juncture in 2025, marked by a collision of regulatory innovation, market power realignments, and valuation volatility. The passage of the U.S. GENIUS Act and the EU's MiCA framework has redefined the rules of engagement for stablecoin issuers, creating both opportunities and existential risks for traditional banks and nonbank entities alike. This analysis unpacks the strategic regulatory risks and shifting market dynamics shaping the sector, with a focus on valuation impacts and institutional behavior.

Regulatory Frameworks: A Double-Edged Sword

The GENIUS Act, enacted in July 2025, established a federal framework requiring stablecoins to be fully backed by high-quality liquid assets (HQLA) and mandating monthly public attestations and annual audits. While this has enhanced transparency and consumer trust, it also banned interest payments on stablecoins, effectively outlawing yield-bearing models that nonbank issuers like Tether and Circle had leveraged to attract users according to Grant Thornton. This prohibition has forced nonbank entities to pivot to indirect incentives, such as "marketing rewards," to retain market share as BlackRock reports.

Conversely, the EU's MiCA regulation, which took effect in 2025, imposed similar reserve and audit requirements but allowed for greater flexibility in cross-border operations. The convergence of these frameworks has created a globally harmonized but tightly regulated environment, where compliance costs are rising for all participants. For traditional banks, the GENIUS Act opened a pathway to issue stablecoins under federal oversight, but it also exposed them to competitive pressures from nonbank entities that can innovate faster according to Grant Thornton.

Market Power Dynamics: Banks vs. Nonbanks

The regulatory shifts have intensified the rivalry between traditional banks and nonbank stablecoin issuers. Nonbank entities, such as Circle and Tether, initially dominated the market, with USDC and USDT collectively holding 89% of the stablecoin market share in early 2025. However, by year-end, their combined share had dropped to 84%, as new entrants and traditional banks began to carve out niches according to JAMSADR.

JPMorgan, for instance, launched its deposit token JPMD on Coinbase's Base blockchain, while SoFi introduced SoFiUSD, a stablecoin backed by FDIC-insured deposits as reported by American Banker. These moves highlight banks' attempts to leverage their regulatory credibility and existing customer bases to compete with nonbanks. Meanwhile, nonbank issuers like Klarna and Western Union have capitalized on their agility to expand into emerging markets and DeFi ecosystems as American Banker reports.

The stock performance of key players underscores these dynamics. Circle's IPO in June 2025 saw its shares surge from $31 to over $250, only to retreat to $85 by December 2025 amid concerns over declining interest rates and macroeconomic headwinds according to The Block. JPMorgan analysts upgraded Circle's stock to "overweight" in late 2025, citing its strategic partnerships and the growth of USDC's market capitalization to $73.7 billion by September according to JAMSADR. In contrast, Tether faced a ratings downgrade from S&P Global in November 2025 due to its inclusion of Bitcoin in reserves, a move that eroded confidence in its compliance with the GENIUS Act as reported by Yahoo Finance.

Valuation Impacts and Systemic Risks

The GENIUS Act's restrictions on interest payments have had mixed valuation effects. For nonbank issuers, the inability to offer direct yields has pressured revenue models reliant on interest income. Circle, for example, derives over 90% of its revenue from interest on cash and Treasuries backing its stablecoins, making it highly sensitive to rate cuts. This vulnerability was evident in its stock price volatility, which mirrored broader crypto market trends and macroeconomic shifts.

Traditional banks, meanwhile, face a different challenge: deposit flight. The Federal Reserve's Stablecoin Certification Review Committee has raised alarms about the potential for nonbank stablecoins to siphon deposits from banks, particularly if they offer indirect yield-like incentives through marketing campaigns according to Grant Thornton. This risk has prompted banks to lobby for stricter regulations, including bans on affiliated entities offering such incentives according to Grant Thornton.

Systemic risks remain a critical concern. Critics argue that the GENIUS Act's allowance of nonbank-issued, uninsured stablecoins creates a "Subprime 2.0" scenario, where a lack of FDIC insurance and prudential safeguards could lead to investor runs during market stress as Ineconomics reports. The collapse of TerraUSD in 2024 serves as a cautionary tale, underscoring the need for robust reserve management and liquidity controls.

Conclusion: A Tipping Point for the Sector

The stablecoin rewards debate has crystallized into a broader struggle over who controls the future of digital money. Regulatory frameworks like the GENIUS Act and MiCA have imposed necessary guardrails but also created new friction points between innovation and stability. For investors, the key takeaway is that valuation risks are no longer confined to technical or operational failures-they are now deeply intertwined with regulatory and competitive forces.

As the sector evolves, the winners will likely be those who can navigate the dual imperatives of compliance and innovation. For nonbank issuers, this means finding creative ways to offer value without violating interest bans. For banks, it means leveraging their regulatory advantages to build trust in stablecoin ecosystems. The coming months will test whether the sector can balance these priorities-or whether the next crisis will emerge from the very frameworks designed to prevent one.