US stablecoin yield restrictions may drive investors toward unregulated offshore markets
Industry experts caution that yield restrictions outlined in the US CLARITY Act may fuel investor appetite for synthetic dollar instruments and offshore products beyond the reach of US regulators.
Restrictions on yield generation for stablecoins proposed within the US CLARITY Act could force capital away from regulated financial markets and toward offshore, less transparent financial instruments.
According to Colin Butler, head of markets at Mega Matrix, preventing regulated stablecoins from providing yield opportunities would fail to safeguard the US financial infrastructure, and would instead marginalize regulated entities while hastening capital flight beyond the jurisdiction of US regulators.
There's always going to be demand for yield. If compliant stablecoins can't offer it, capital will simply move offshore or into synthetic structures that sit outside the regulatory perimeter.
Colin Butler, head of markets at Mega Matrix
The recently implemented GENIUS Act mandates that payment stablecoins like USDC maintain full backing through cash or short-term Treasuries and bars them from distributing interest payments directly to token holders. This regulatory framework categorizes stablecoins as digital currency rather than yield-generating financial instruments. Butler contended that this approach establishes a structural disparity, especially considering that three-month US Treasuries currently yield approximately 3.6% while conventional savings accounts deliver significantly lower returns.
According to Butler, the "competitive dynamic for banks isn't stablecoins versus bank deposits," but rather banks compensating depositors with minimal interest rates while retaining the yield differential for their own benefit. He further noted that when investors have access to 4% to 5% returns on stablecoin deposits via exchanges, in contrast to nearly zero yields offered by banks, capital migration becomes a logical response.
Yield ban could drive demand for "synthetic dollars"
Andrei Grachev, founding partner at Falcon Finance, cautioned that constraining domestic yield opportunities may generate a market void that would be occupied by synthetic dollars, which are dollar-denominated instruments that preserve price stability through complex trading mechanisms instead of maintaining one-to-one fiat currency reserves.
The real risk isn't synthetics themselves - it's unregulated synthetics operating without disclosure requirements.
Andrei Grachev, founding partner at Falcon Finance
Butler referenced Ethena's USDe as a notable illustration, observing that it produces yield through delta-neutral trading strategies utilizing crypto collateral and perpetual futures contracts. Since these products exist beyond the GENIUS Act's classification of payment stablecoins, they operate within a regulatory ambiguity.
If Congress is trying to protect the banking system, they have inadvertently accelerated capital migration into structures that are largely offshore, less transparent, and completely outside US regulatory jurisdiction.
Colin Butler
Banking institutions have contended that stablecoins offering yield could precipitate deposit withdrawals and diminish their ability to extend credit. Grachev recognized that deposits represent a fundamental component of bank financing, but maintained that characterizing the situation as inequitable competition overlooks the broader context.
Consumers already have access to money markets, T-bills, and high-yield savings accounts. Stablecoins simply extend that access into crypto-native environments where traditional rails are inefficient.
Andrei Grachev
Stablecoin yield bans could hurt US competitiveness
Looking beyond domestic considerations, Butler cautioned about global competitive ramifications. China's digital yuan introduced interest-bearing capabilities earlier this year, while regulatory authorities in Singapore, Switzerland and the UAE are proactively establishing frameworks for yield-generating digital financial instruments.
If the US bans yield on compliant dollar stablecoins, we're essentially telling global capital: choose between zero-yield American stablecoins or interest-bearing Chinese digital currency. That's a gift to Beijing.
Colin Butler
Grachev maintained that the US retains a window of opportunity to establish leadership by implementing transparent standards for compliant, independently auditable yield-bearing products. The present CLARITY Act proposal, however, threatens to produce the contrary outcome by classifying all yield mechanisms as identical and neglecting to differentiate between transparent, regulated frameworks and obscure offshore alternatives.