Note this post was written July 11, 2025 and does not reflect subsequent developments.

EXECUTIVE SUMMARY

• The US Senate passed the GENIUS Act on June 17, promising a stable regulatory framework for stablecoin issuers.
• The GENIUS Act excludes yield-bearing stablecoins from its regulatory framework. Citi estimates this would stifle stablecoin’s bull-case, medium-term market capitalization by over $750 billion. Moreover, it would hinder beneficial innovation long-term.
• Lawmakers in the House should include interest-yielding stablecoins in the definition of “payment stablecoins” because this restriction provides only marginal “systemic risk” reduction at substantial cost to innovation. GENIUS Act rules on capital ratios and reserves are sufficient to handle potential risks.

INTRODUCTION

During the Biden administration, the SEC cracked down on cryptocurrencies by asserting that all tokens—regardless of their function—were unregistered securities. This aggressive stance left crypto issuers and exchanges in regulatory limbo. The SEC refused to issue clear rules for registration, yet launched high-profile enforcement actions against major players like Coinbase and Ripple. Firms faced the impossible choice of risking litigation or attempting to comply with a regime that, in practice, didn’t exist. It was regulation by lawsuit. Then, on June 17, the U.S. Senate passed the “Guiding and Establishing National Innovation for U.S. Stablecoins” (GENIUS) Act.

The GENIUS Act doesn’t itself spell out all the rules but (1) it clearly divides regulatory responsibility among the three and four-letter acronyms: SEC, OCC, FDIC, etc; and (2) it requires these regulatory agencies to promptly promulgate rules for everything from required capital ratios to anti-money laundering guidelines. No matter what shenanigans happen in the House, for stablecoin issuers, the key point is certainty soon. 

The GENIUS Act also includes safeguards to prevent harms from stablecoins; “systemic risk” is one prominent harm the Act addresses. The Act includes capital and reserve requirements that mirror sensible banking regulations put in place after the 2008 financial crisis. It also excludes yield-bearing stablecoins from its definition of “payment stablecoins”. This provision will leave in the cold a class of stablecoins that JP Morgan estimates would otherwise make up 50% of the stablecoin market by 2030. More importantly, it will leave consumers forever with a product that costs them more in foregone returns.

This post elaborates on the potential benefits to consumers of yield-bearing stablecoins and explains why many of the associated risks are mitigated by other GENIUS Act provisions. I conclude that the House should amend the GENIUS Act to include yield-bearing stablecoins in the Act’s definition of “payment stablecoins”.

THE POTENTIAL OF YIELD-BEARING STABLECOINS

Stablecoins are peculiar in the crypto world. While Bitcoin and Ethereum are famously volatile, USDC, an archetypal stablecoin, has only traded between $0.9993 and $1.0004 this past year. This is because stablecoins are redeemable for dollars.

Stablecoins have become the “killer app” of blockchain technology. Early crypto anarchists would be shocked to find their technology intertwined with a symbol of state power: the dollar. But it makes sense. Blockchains often offer more speed and lower transaction costs especially across borders; dollars offer the full faith and credit of the US government. Together, they today back $238 billion worth of stablecoins and facilitated transaction volumes of $27.6 trillion in 2024, more than Visa and Mastercard combined.

And stablecoins have the potential to do much more. Right now, BCG estimates 88% of stablecoin transactions are connected to crypto trading—usually as collateral for trading perpetual futures. Citi projects stablecoins will begin to capture substantial chunks of everyday use cases like payments and banking by 2030:

Source: Citi Institute Global Perspectives & Solutions

Regulatory acceptance of yield-bearing stablecoins are key to achieving the most positive outlook. $765 billion of $3.7 trillion (20.6%) of stablecoin’s market capitalization in Citi’s bull case is directly attributable to use of stablecoins as a substitute for money market funds, which requires “interest bearing stablecoins” (see rows 4 and 7 above). More fundamentally, offering interest is necessary to compete with other forms of money—especially in our current world of high interest interest rates. Lowering the cost of stablecoins by reducing the foregone interest relative to holding bank deposits instead will increase demand for stablecoins in all use cases.

But that’s just the visible cost. The invisible cost of quashing yield-bearing stablecoins is the innovations that could have resulted; the total cost likely significantly outstrips the visible costs. Right now, stablecoins are limited to niche use cases around cross-border situations where traditional financial tools are slow and expensive. But in a world where stablecoin issuers and supporting infrastructure providers compete to bring down costs and produce a better product, stablecoins could plausibly replace bank deposits for most people. In turn, because of the unique programmable nature of blockchains, this could have opened up a new world of financial innovation. I don’t think this was ever likely to happen but with the current GENIUS Act, this outcome is almost impossible. That’s a large loss.

THE RISKS WE COULD’VE MITIGATED IN LESS COSTLY WAYS

The most compelling reason for excluding yield-bearing stablecoins is the systemic risks they pose. There are other costs associated with yield-bearing stablecoins but they are small potatoes compared to the benefits.

2008 burned “systemic risk” into financial regulators’ brains and so it’s useful to retell what happened then. In September 2008, Lehman Brothers, the 4th largest investment bank at the time, went bankrupt. A crisis of confidence engulfed the financial sector, leading to the worst financial crisis since the Great Depression and a deep recession. The public fallout around bailouts to “too big to fail” banks still ripples today. This is the story of systemic risk—one company becomes systemically tied with the whole economy and so its risk-taking becomes America’s risk-taking.

Of course, the best way to stop systemic risk from stablecoins is to make sure stablecoins never become widespread. And indeed, excluding yield-bearing stablecoins does this well.

But systemic risk is nothing special; it’s a combination of two textbook economic problems: an externality and a bank run. While mortgage-backed securities, collateralized debt obligations, and other financial wizardry played a part in the 2008 financial crisis, It’s a Wonderful Life tells most of the story. Lehman needed to borrow 29 dollars for every 30 dollars it was giving out. It needed to do this everyday through the reverse repo market. And when the lenders on this market smelled trouble, they ran—just like the townspeople ran on George Bailey’s Building & Loan. The externality part is even simpler: banks didn’t pay the full cost of their risk-taking.

And the solution to an externality is not a ban; it’s sensible regulation that weighs costs and benefits. After 2008, we did a reasonable job of patching the systemic risk problem. Most importantly, we instituted higher capital requirements. Capital—stock which cannot be traded for a fixed amount of money on demand—in large quantities solves the problem. If a bank makes a bad loan, now its stockholders pay the price. The risk is no longer systemic.

The GENIUS Act ports over capital requirements to the world of stablecoins. This is a desirable regulation because stablecoin issuers can blow up much the way Lehman did. An issuer (say AAF) might receive money, give out stablecoins (call them AAF Coins), and then put that money into a primordial soup of financial assets. That primordial soup might appear to fall in value—or actually fall in value—leading AAF Coin buyers to ask for their dollars back. When those dollars can’t be found, the angry buyers will themselves be unable to cover their obligations and the effects might move through the American economy and beyond. With capital requirements, the buck stops with AAF shareholders—as long as the losses in the primordial soup don’t exceed the capital buffer.

The GENIUS Act also has well-defined reserve requirements that will prevent mischief. They serve a similar purpose to the Volcker Rule—but are simpler and more effective. Instead of a primordial soup, issuers can only put their dollars into bank accounts and short-term treasury bonds. This makes sense since any capital requirement can be made too small with sufficient risk taking, and crypto can often be the wild west. Yes, bank deposits and short-term treasuries can lose value too—see the 2023 Silicon Valley Bank collapse. But that’s what the capital buffer is for.

CONCLUSION

Stablecoins are a potential solution to payments and banking inconveniences. They also give rise to systemic risks. The GENIUS Act gets the balance between benefits and risks wrong by regulating too tightly against systemic risk, particularly in its exclusion of interest-yielding stablecoins; the Act should be fixed before final passage.