Stablecoin yield ban takes effect under GENIUS Act, raising offshore migration concerns

The GENIUS Act, signed into law in July 2025, has banned stablecoin issuers from paying yield or interest directly to token holders.

The regulation requires stablecoins to be fully backed by cash or short-term Treasury securities and function as payment tools rather than yield-generating investments.

The restriction has triggered intense pushback from the crypto industry, which warns that investors will migrate capital to offshore dollar tokens and foreign digital currencies rather than accept zero returns on stablecoin balances.

U.S. Regulation Redraws The Stablecoin Yield Landscape

The law requires stablecoin issuers to fully back their tokens with cash or short-term U.S. Treasury securities and prohibits them from paying yield or interest directly to holders.

The regulation aims to ensure stablecoins function as digital cash rather than investment products competing directly with bank deposits.

However, the policy has triggered intense pushback from parts of the crypto industry, which argue the restrictions could drive capital away from regulated markets.

Stablecoins, digital tokens pegged to fiat currencies like the U.S. dollar have become a core component of the cryptocurrency ecosystem, facilitating trading, decentralized finance (DeFi) lending and cross-border payments.

With the market exceeding hundreds of billions of dollars in circulation, even minor regulatory shifts could influence global liquidity flows.

Critically, the U.S. law bans yield payments by issuers but leaves room for third-party platforms such as exchanges or DeFi protocols to offer “rewards” tied to stablecoin balances.

Banks Warn Of Deposit Flight As Crypto Platforms Compete

Traditional financial institutions say yield-bearing stablecoins could drain deposits from banks.

According to a U.S. Treasury estimate cited by banking groups, as much as $6.6 trillion in deposits could migrate to stablecoins if investors can earn higher returns outside the banking system.

Banks argue that stablecoin platforms distributing yield effectively transform digital dollars into high-yield savings products.

“Greater deposit flight risk, especially in times of stress, will undermine credit creation throughout the economy.”

Banking lobby groups warned in a letter to lawmakers.

From the banks’ perspective, stablecoins offering 4–5% returns often derived from U.S. Treasury yields.

The easily outperform traditional savings accounts that currently offer less than 1% interest.

The concern reflects  structural shift in finance: digital assets may increasingly compete with banks for deposits, potentially altering how credit flows through the economy.

Crypto Industry Argues Demand For Yield Will Persist

Crypto executives and market analysts counter that banning stablecoin yields does not eliminate investor demand for returns. Instead, they say, capital will simply move elsewhere.

Industry groups have also warned that expanding the yield ban to third-party platforms stifle innovation and concentrate power in traditional financial institutions.

In a letter to U.S. lawmakers, the Blockchain Association argued that prohibiting rewards programs across the crypto ecosystem would be anti-competitive.

Some executives believe yield-bearing stablecoins could even push banks to improve interest rates offered to customers.

Patrick Collison, CEO of Stripe, discussing the competitive pressure stablecoins could bring to traditional finance.

Global competition and the future of digital dollars

Beyond domestic regulation, analysts warn that strict yield restrictions could weaken the global influence of dollar-based stablecoins.

Some investors fear that limiting returns on U.S.-regulated stablecoins may push users toward alternative digital currencies including offshore dollar tokens or foreign central bank digital currencies (CBDCs).

Anthony Scaramucci, founder of SkyBridge Capital, has argued that the policy could even give an advantage to competing digital currencies abroad.

“The banks do not want the competition from the stablecoin issuers, so they’re blocking the yield.” Scaramucci said in comments reported by crypto media.

Regulators, however, maintain that the goal is financial stability. Stablecoins that promise high yields without sufficient reserves could pose systemic risks similar to past crypto failures.

As lawmakers debate further legislation  including the Digital Asset Market Structure CLARITY Act, still under review in the U.S. Senate.

The unresolved question remains whether stablecoins should function purely as payment tools or evolve into yield-generating financial products.

The outcome could determine not only where stablecoin liquidity flows but also which jurisdictions emerge as global hubs for the next generation of digital finance.