Subhead: The rising battle over stablecoin interest yields exposes a trillion-dollar fight shaking up America’s financial system.
Stablecoins like USDC are changing the rules of money. Under the 2023 GENIUS Act, meant to regulate stablecoins, banks and crypto firms face off over a surprising loophole: stablecoins can’t pay holders interest directly, but exchanges can. This loophole thrusts stablecoin yields into the spotlight, challenging traditional banks stuck with near-zero savings rates.
In this article, you’ll get a deep dive into the GENIUS Act’s effect on stablecoin yields, how Coinbase and Circle use it to offer 4.5% returns, and why banks fiercely oppose these crypto rewards. We’ll break down the regulatory battle and what it means for 21st-century savings, plus the risks every investor should know.
What Is the GENIUS Act and Why Does It Matter?
The GENIUS Act, signed into law in 2023, was designed to put stablecoins on a clear legal footing in the US. The acronym stands for Guiding and Establishing National Innovation for US Stablecoins. By bringing issuers like Circle (creator of USDC) and Paxos under federal regulations, it aimed to prevent the chaotic fallout seen with failed projects like Terra and to stop stablecoins from operating as “shadow banks.”
Key Provisions in the GENIUS Act
- 100% Reserve Requirement: Every USDC coin must be backed 1:1 by a real dollar or ultra-short (under 90 days) US Treasury bill.
- No Lending or Reinvestment: Unlike banks, stablecoin issuers can’t lend out or reinvest these reserves — no fractional reserve banking here.
- Ban on Direct Interest Payments: Stablecoin issuers cannot pay interest directly to holders to keep stablecoins as simple payment tools, not investment products.
How the Stablecoin Yield Loophole Works
Banks wanted the GENIUS Act to limit stablecoins to payment functions only — no interest allowed. But there’s a catch. The law only prohibits issuers from paying interest directly. It doesn’t say anything about third-party distributors, like crypto exchanges, paying yield funded by the Treasury interest income Circle earns.
Here’s the flow at Coinbase, where this plays out:
| Step | Description |
|---|---|
| 1 | You deposit $100 USDC on Coinbase. |
| 2 | Circle backs your $100 with $100 in Treasury bills paying ~5% yield. |
| 3 | Circle earns that 5% yield, then pays a marketing fee to Coinbase. |
| 4 | Coinbase shares about 4.5% APY of that fee back to you as rewards. |
This looks exactly like a high-yield savings account — liquidity of a checking account with a certificate of deposit level yield, minus FDIC insurance. For users, it feels like interest, but legally it’s branded a “reward” or “loyalty incentive” paid by the exchange.
Why Are Banks Threatened?
Traditional banks pay pocket change on deposits. The national average checking account interest rate is close to 0.01%. Savings accounts can reach maybe 0.5% if you’re lucky. Meanwhile, stablecoin yield rewards are around 4.5%, nearly 10x higher.
Banks operate with heavy overhead:
- Branch networks
- Compliance teams
- Deposit insurance (FDIC)
- Aging IT systems
They can’t compete on price — so they lobby regulators to squash these crypto yields. Losing this battle means:
- Losing customers to crypto.
- Losing control over fractional reserve lending, the main engine banks use to create money and profits.
The Stakes: Money and Market Power
Circle currently has roughly $70 billion in USDC collateral. At a 5% Treasury yield, that’s $3.5 billion in annual revenue from safe, short-term government bonds — no loans or credit risk involved. This windfall funds exchanges, rewards, and builds growth in the crypto ecosystem.
Coinbase relies on pass-through yield as a crucial revenue driver, especially as trading fees shrink due to competition. If regulators block this, it threatens the core economics of crypto platforms.
Answer Box: What’s the stablecoin yield loophole in the GENIUS Act?
The GENIUS Act bans stablecoin issuers like Circle from paying interest directly to holders but does not restrict third-party platforms, such as crypto exchanges, from passing Treasury yield-based rewards to users. This gap allows exchanges like Coinbase to legally offer 4.5% yields on USDC stablecoins, sparking a regulatory battle with traditional banks.
Risks and What Could Go Wrong
- Regulatory Crackdown: Lawmakers could close the loophole, banning yield pass-through altogether. This would slash returns for stablecoin holders.
- Lack of FDIC Insurance: Unlike bank accounts, USDC is not insured by the government. While collateral is in Treasuries, custodial risk remains.
- Platform Risk: Exchanges could reduce or stop rewards if Treasury yields fall or if regulatory costs rise.
- Market Volatility: Crypto platforms and stablecoins remain vulnerable to systemic shocks or tech failures.
Summary: What Investors Should Take Away
- The GENIUS Act created a regulatory framework stabilizing stablecoins but banned issuers from paying direct interest.
- Crypto exchanges like Coinbase exploit a loophole allowing them to pass Treasury yield-derived rewards to users.
- Stablecoin yields (around 4.5%) far outpace traditional bank savings payments (<0.5%).
- Banks see stablecoin yields as a threat to their customer base and fractional reserve money creation powers, fueling a fierce lobbying battle.
- Investors should weigh attractive yields against regulatory and custodial risks.
Looking for deeper insight on crypto trends like this?
Get the full playbook on stablecoins, yield strategies, and regulatory developments in today’s Wolfy Wealth PRO brief. Stay ahead with timely alerts and model portfolios designed for the savvy crypto investor.
FAQs
Q: Are stablecoin yields guaranteed?
No. While the underlying reserves are short-term US Treasuries, yield payments come from exchange incentives that may change or stop.
Q: How does USDC maintain its dollar peg?
USDC issuers hold one US dollar or Treasury-equivalent for every coin issued, keeping the token pegged to $1. Q: Why can’t stablecoin issuers pay interest directly?
The GENIUS Act bans it to classify stablecoins as payment instruments, not investment products that compete with banks’ savings accounts.
Q: What is fractional reserve banking, and why does it matter?
Banks lend out most deposits, keeping a fraction on hand, creating new money through lending. Stablecoins must keep full reserves, limiting lending but improving solvency.
Q: Is stablecoin yield riskier than traditional bank interest?
Potentially. Stablecoin yield is not FDIC insured and depends on platform policies and regulatory outcomes.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Always do your own research and consult a professional before investing in crypto or traditional assets.
By Wolfy Wealth - Empowering crypto investors since 2016
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Disclosure: Authors may be crypto investors mentioned in this newsletter. Wolfy Wealth Crypto newsletter, does not represent an offer to trade securities or other financial instruments. Our analyses, information and investment strategies are for informational purposes only, in order to spread knowledge about the crypto market. Any investments in variable income may cause partial or total loss of the capital used. Therefore, the recipient of this newsletter should always develop their own analyses and investment strategies. In addition, any investment decisions should be based on the investor's risk profile
