Opinion: The GENIUS Act stifles yield-bearing stablecoins but may save Decentralized Finance.

This week, the U.S. Congress may pass the most influential Crypto Assets bill in a decade, while clearly defining the boundaries of one of the most ambiguous areas in Decentralized Finance (DeFi): yield-bearing stablecoins.

Written by: Ben Nadareski, Coindesk

Compiled by: Shaw Golden Finance

Summary

• The U.S. Congress is about to pass the "GENIUS Act", an important Crypto Assets bill that will regulate stablecoins and prohibit interest payments on them.
• The bill stipulates that compliant stablecoins must be backed by cash and short-term U.S. Treasury securities, aligning the crypto asset reserves with U.S. monetary policy.
• By prohibiting yield stablecoins, the law aims to protect U.S. banks and may drive Decentralized Finance (DeFi) towards more transparent and sustainable financial practices.

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

At first glance, the "GENIUS Act" appears to be a straightforward regulatory victory. It will ultimately provide a legitimate development space for fiat-backed stablecoins worth over $120 billion and establish clear regulations for compliant payment stablecoins.

But a deeper examination of the details will reveal that this is not a complete release. In fact, according to the strict requirements of the law - independent reserves, high-quality liquid assets, and generally accepted accounting principles.

(GAAP) certification - currently only about 15% of stablecoins can truly meet the requirements.

What is even more striking is that the bill explicitly prohibits stablecoin interest or yield payments. This is the first time U.S. lawmakers have clearly distinguished between stablecoins as payment tools and stablecoins as yield assets. Overnight, it has overturned decades of experimentation in the Crypto Assets field, forcing Decentralized Finance (DeFi) to either evolve or risk falling back into the shadows.

Hard Stop on Yield-Generating Stablecoins

For many years, DeFi has been trying to achieve the best of both worlds: to provide seemingly "stable" assets while quietly generating returns and avoiding securities regulations. The "GENIUS Act" has broken this ambiguity. According to the new law, any stablecoin that generates returns directly through a staking mechanism or indirectly through pseudo-Decentralized Finance savings accounts is now clearly outside the compliance scope. In short, yield-generating stablecoins have been abandoned.

Congress sees this as a way to protect American banks. By prohibiting stablecoins from earning 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 interest-free helps maintain the fundamental structure of the U.S. credit system.

But a deeper transformation is happening. This is no longer just a compliance issue, but a thorough reflection on the credibility of large-scale collateral.

The Self-Reinforcing Effect of Treasury Bonds and Currency

According to the "GENIUS" Act, all compliant stablecoins must be backed by cash and short-term government bonds with maturities of 93 days or less. This effectively skews the reserve strategy of Crypto Assets towards short-term U.S. Treasury instruments, linking Decentralized Finance to U.S. monetary policy more closely than most are willing to acknowledge.

We are talking about a currently tradable bond market of about $28.7 trillion. Meanwhile, the circulation of the stablecoin market has exceeded $250 billion. Therefore, even if only half of it (about $125 billion) turns to short-term government bonds, it means a significant shift, injecting the liquidity of Crypto Assets directly into the U.S. debt market.

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

This is a new type of currency reflectivity: DeFi now fluctuates in sync with the health of the government bond market. This both has a stabilizing effect and has become a new source of systemic risk.

Why This Could Be the Healthiest Moment for Decentralized Finance

Ironically, by banning stablecoin yields, the "GENIUS" bill could actually steer Decentralized Finance towards a more transparent and sustainable direction.

Due to the inability to directly embed returns into stablecoins, the protocol is forced to build returns externally. This means that neutral strategies, capital arbitrage, dynamic hedging pledges, or open liquidity pools need to be used, allowing anyone to audit risks and returns. This will shift the competition from "Who can promise the highest annual return?" to "Who can build the smartest and most robust risk engine?".

It will also introduce new moats. By embracing smart compliance protocols through the embedding of Anti-Money Laundering (AML) tracks, certification layers, and token flow whitelists, this emerging capital corridor will be opened and institutional liquidity will be leveraged.

What about the others? Isolated on the other side of regulatory barriers, they hope that the shadow currency market 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 determine 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, the boundaries are clearer and the system is more robust.

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

This may be the healthiest transformation that DeFi can achieve in its current state. Because if DeFi wants to supplement the traditional financial system or even compete with it, it cannot rely on ambiguous boundaries and regulatory gray areas. It must clearly demonstrate where the profits 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 in this industry.