Author: Ben Nadareski

Source: Coindesk

Translation: Shaw Golden Finance

Abstract

• The U.S. Congress is about to pass the GENIUS Act, an important cryptocurrency legislation that will regulate stablecoins and prohibit them from paying interest.

• The act stipulates that compliant stablecoins must be backed by cash and short-term U.S. Treasury securities, aligning cryptocurrency reserves with U.S. monetary policy.

• By prohibiting yield-bearing stablecoins, the law aims to protect U.S. banks and may push decentralized finance (DeFi) towards more transparent and sustainable financial practices.

This week, the U.S. Congress may pass the most influential cryptocurrency legislation in a decade, while clearly delineating the boundaries of one of the most ambiguous areas in decentralized finance (DeFi): yield-bearing stablecoins.

At first glance, the GENIUS Act appears to be a straightforward regulatory victory. It will ultimately provide a legal development space for over $120 billion in fiat-backed stablecoins, establishing clear standards for compliant payment stablecoins.

However, a deeper examination of the details reveals that this is not a comprehensive green light. In fact, under the strict requirements of the law—independent reserves, high-quality liquid assets, and Generally Accepted Accounting Principles (GAAP) verification—only about 15% of stablecoins currently meet the criteria.

More notably, the act explicitly prohibits stablecoins from paying interest or yields. This marks the first time U.S. lawmakers have clearly distinguished between stablecoins as payment instruments and stablecoins as yield-bearing assets. Overnight, it upended decades of experimentation in the cryptocurrency space, forcing decentralized finance (DeFi) to either evolve or risk falling back into the shadows.

Hard Stop on Yield-Bearing Stablecoins

For years, DeFi has tried to have it both ways: providing seemingly "stable" assets while quietly generating yields and avoiding securities regulation. The GENIUS Act breaks this ambiguity. Under the new law, any stablecoin that generates yields directly through staking mechanisms or indirectly through pseudo-decentralized finance savings accounts is now clearly outside the compliance scope. In short, yield-bearing stablecoins have been abandoned.

Congress views this as a way to protect U.S. banks. By prohibiting stablecoins from generating interest, lawmakers hope to prevent trillions of dollars from flowing out of traditional deposits, which provide loan guarantees for small businesses and consumers. Keeping stablecoins yield-free helps maintain the fundamental structure of the U.S. credit system.

But a deeper transformation is occurring. This is no longer just a compliance issue; it is a profound reflection on the credibility of large-scale collateral.

The Self-Reinforcing Nature of Treasuries and Currency

According to the GENIUS Act, all compliant stablecoins must be backed by cash and short-term Treasury securities with maturities of 93 days or less. This effectively steers the reserve strategy of cryptocurrencies towards short-term U.S. Treasury instruments, linking DeFi more closely to U.S. monetary policy than most are willing to admit.

We are talking about a currently approximately $28.7 trillion tradable bond market. Meanwhile, the circulation of the stablecoin market has exceeded $250 billion. Therefore, even if only half of that (about $125 billion) shifts to short-term Treasuries, it signifies a significant transformation, injecting cryptocurrency liquidity directly into the U.S. debt market.

Under normal circumstances, this allows the system to operate smoothly. However, in the event of interest rate shocks, these capital flows could suddenly reverse, triggering liquidity crunches in lending protocols that use USDC or USDP as so-called "risk-free assets."

This represents a new form of monetary reflexivity: DeFi now fluctuates in sync with the health of the Treasury market. This serves both as a stabilizing force and a new source of systemic risk.

Why This May Be DeFi's Healthiest Moment

Ironically, by prohibiting stablecoin yields, the GENIUS Act may actually guide DeFi towards a more transparent and sustainable direction.

With yields unable to be directly embedded in stablecoins, protocols are forced to build yields externally. This means employing neutral strategies, capital arbitrage, dynamic hedging of stakes, or opening liquidity pools that allow anyone to audit risks and returns. This will shift competition from "who can promise the highest annual yield?" to "who can build the smartest, most robust risk engine?"

It will also create new moats. Embracing smart compliance protocols by embedding anti-money laundering (AML) tracks, certification layers, and token flow whitelists will open this emerging capital corridor and leverage institutional liquidity.

What about others? Isolated on the other side of regulatory barriers, hoping that shadow currency markets can support them.

Most entrepreneurs underestimate the speed at which the cryptocurrency market re-prices regulatory risks. In traditional finance, policy determines the cost of capital. In the DeFi space, policy will now dictate the channels for capital acquisition. Those who ignore these boundaries will watch partnerships stagnate, listing opportunities vanish, and exit liquidity evaporate, as regulation quietly decides who can stay in the game.

In the Long Run, Clearer Boundaries and a Healthier System

The GENIUS Act is not the end of DeFi, but it does shatter a certain illusion: that passive yields can be indefinitely attached to stablecoins without transparency or trade-offs. From now on, these yields must come from real sources, with collateral, disclosure, and rigorous stress testing.

This may be the healthiest transformation DeFi can make in its current state. Because if DeFi wants to supplement or even compete with the traditional financial system, it cannot rely on ambiguous boundaries and regulatory gray areas. It must precisely demonstrate where yields come from, how they are managed, and who bears the ultimate risk.

In the long run, this could be one of the best things to happen to the industry ever.

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