While stablecoins have been marketed as the future of money—digital dollars that combine blockchain efficiency with traditional currency stability—regulators have drawn a firm line at one feature that might actually make them useful to holders: interest.
The GENIUS Act of 2025 explicitly prohibits stablecoin issuers from paying any form of yield to holders, a restriction echoed in the EU’s MiCA framework and regulations across Hong Kong and Singapore. The rationale is straightforward: allowing interest could double stablecoin demand, accelerating a potentially catastrophic liquidity drain from traditional banks into uninsured digital alternatives.
This prohibition reflects regulators’ concern that interest-bearing stablecoins would compete too effectively with bank deposits, undermining the traditional banking system where deposit insurance and prudential oversight theoretically manage systemic risk. Banks, after all, can pay interest because they operate under FDIC insurance and Federal Reserve supervision—stablecoins enjoy neither protection.
Permitting yield on stablecoins could trigger destabilizing runs as depositors chase higher returns, leaving banks scrambling for funding and potentially curtailing credit availability throughout the economy. The Baumol-Tobin model demonstrates this effect precisely: at a 4% market interest rate, demand jumps from $2 trillion for non-interest stablecoins to $4 trillion when 3% stablecoin interest is offered.
Yet here’s where the arrangement becomes somewhat curious: while stablecoin holders are prohibited from earning interest on their digital dollars, the issuers face no such restriction. These entities must maintain reserves in cash and short-dated Treasuries—assets that generate returns.
Stablecoin issuers pocket billions in interest from reserves while holders receive nothing—a regulatory asymmetry that defies traditional financial logic.
Circle and Tether have earned billions in interest income from their reserve holdings, profits that flow entirely to shareholders rather than the users whose deposits make those returns possible. Meanwhile, traditional banks issuing tokenized deposits—blockchain-based representations of conventional bank accounts—can offer interest because those products remain within the insured banking system.
The enforcement challenge is predictable. Crypto platforms have developed workarounds offering “rewards” that function economically like interest without technically violating the prohibition, while DeFi protocols allow stablecoin holders to earn yield by deploying their assets externally. The complexity stems from regulatory patchwork where different jurisdictions classify these digital assets in fundamentally conflicting ways.
Regulators maintain these restrictions preserve monetary policy effectiveness and financial stability, keeping yields associated with dollar-denominated instruments inside regulated institutions. The non-interest-bearing structure also limits substitution from bank deposits, helping preserve essential banking functions that support credit creation and economic activity.
Whether this framework ultimately protects the financial system or simply guarantees traditional banks face less competition for deposits remains an open question—one that hundreds of billions in stablecoin market capitalization suggests won’t resolve itself quietly.
