Stablecoin Yield Bans Could Push Capital Offshore into Unregulated Instruments

Regulatory efforts to restrict stablecoin yields in the United States are raising concerns about capital flight to unregulated markets. The proposed CLARITY Act, combined with the recently enacted GENIUS Act, has created a regulatory environment that limits the financial utility of stablecoins.

Colin Butler, head of markets at Mega Matrix, has noted that the inability of compliant stablecoins to offer yield is pushing investors toward unregulated alternatives. According to Butler, capital is likely to shift "offshore or into synthetic structures that sit outside the regulatory perimeter" if onshore options remain unattractive.

The GENIUS Act treats stablecoins as digital cash rather than financial instruments capable of generating returns. This has led to a structural imbalance, particularly as traditional bank savings accounts yield near-zero returns, while short-term US Treasuries offer around 3.6%. Butler argues this creates a competitive disadvantage for regulated institutions.

Why Did This Happen?

The push to ban stablecoin yields stems from concerns by traditional financial institutions about losing deposits. The American Bankers Association has been a vocal advocate for legislation that would prevent stablecoins from substituting for traditional bank deposits. The lobby argues that stablecoins offering interest could destabilize the banking system by drawing away $6 trillion in potential deposits.

This regulatory pressure is also driven by political considerations. With the 2026 midterms approaching, lawmakers are under pressure to pass comprehensive crypto legislation. Banks and lawmakers have aligned to ensure stablecoin yields are restricted before the election cycle intensifies.

How Did Markets React?

Market participants are already adjusting to the evolving regulatory landscape. The total supply of stablecoins has plateaued at approximately $310 billion, reflecting a shift away from speculative minting toward more stable usage cases like payments and settlements.

Jimmy Xue of Axis notes that stricter regulations have forced institutional stablecoin issuers to hold higher-quality reserves, slowing the pace of new issuance. He attributes the consolidation phase to rising compliance costs and higher real yields on US Treasurys, which have increased the opportunity cost of holding stablecoins.

The recent liquidity shock on October 10 also played a role in curbing stablecoin growth. This event triggered forced deleveraging across crypto markets, reinforcing a risk-averse investor sentiment that has further limited expansion.

What Are Analysts Watching Next?

Analysts are closely monitoring the potential consequences of yield bans. Andrei Grachev of Falcon Finance warned that limiting onshore yield could lead to the rise of unregulated synthetic dollars—dollar-pegged instruments that maintain parity through structured trading strategies rather than one-to-one fiat reserves. These instruments pose risks if they operate without disclosure requirements.

Ethena's USDe (USDe) is cited as an example of a synthetic dollar generating yield through delta-neutral strategies. The concern is that such instruments could become a major alternative to regulated stablecoins if yield restrictions remain in place.

Crypto executives are also pushing back against the regulatory pressure. Circle CEO Jeremy Allaire has defended stablecoin yields as a tool for adoption, arguing that a ban would harm US competitiveness against China's digital yuan. Anthony Scaramucci of SkyBridge Capital has echoed this view, warning that a yield ban could put the US dollar at a disadvantage.

The dispute has already affected legislative progress. Coinbase CEO Brian Armstrong withdrew his firm's support for the CLARITY Act after disagreements over stablecoin yield provisions, which reportedly represent $1 billion in annual revenue for the firm.

This move reportedly angered the White House, which is now considering whether to continue supporting the bill. Without a resolution, the CLARITY Act could stall, leaving crypto markets in a regulatory limbo.

The outcome of these discussions will determine whether digital dollars can compete with traditional bank deposits or remain constrained by bank-friendly rules. Investors are watching closely as the debate unfolds on Capitol Hill.