What Did the GENIUS Act Do to Stablecoin Yield — And Why Wasn't That Enough?

[cryptoenthusiast]

The GENIUS Act, signed into law in July 2025, prohibited stablecoin issuers — including Circle, Tether, Paxos, and any newly licensed bank subsidiaries — from paying interest or yield directly to holders. The logic was straightforward: a fiat-pegged token paying passive interest is economically identical to an uninsured bank deposit, and allowing stablecoin issuers to offer deposit-like returns without deposit insurance would create an unlevel playing field with regulated banks and a systemic risk if those issuers faced a run. By restricting yield at the issuer level, lawmakers intended to prevent stablecoins from functioning as shadow savings accounts operating outside the banking regulatory framework.

The problem was that the GENIUS Act only addressed one side of the equation. It stopped issuers from paying yield directly but did not prevent exchanges and distribution partners from offering their own APY-style returns on stablecoin balances to attract and retain users. Coinbase, the primary distributor of USDC, continued offering returns on held balances after the GENIUS Act passed, which banking groups argued created the same deposit-flight risk through a different structural path. The American Bankers Association and other banking trade groups pushed lawmakers to close what they described as a stablecoin-yield loophole, arguing that yield-equivalent rewards offered by exchanges could pull deposits from traditional banks and pressure smaller institutions' loan funding. That pressure led directly to the CLARITY Act compromise introduced in May 2026, which extends similar restrictions to exchanges and custodial crypto platforms.

[bonk]

GENIUS Act closing issuer yield while leaving exchange yield open was always an incomplete regulatory architecture