While the GENIUS Act offers clear benefits, such as expanding global access to the US dollar through stablecoins, some of its restrictions paradoxically create new avenues for growth in other areas of the crypto industry. Specifically, the Act prohibits stablecoin issuers from paying interest to stablecoin holders.
This limitation creates problems for institutions and sophisticated investors constantly seeking yield-bearing opportunities. Luckily for them, decentralized finance (DeFi) offers a vast array of mechanisms that can generate returns. As the GENIUS Act begins to take off, it might also solidify DeFi’s role in the market.
Will the GENIUS Act Redirect Capital to DeFi?
Officially signed into law, the GENIUS Act is already seeing the proliferation of the stablecoin market worldwide.
Now that the United States backs the use of these digital assets with a comprehensive framework that provides sufficient consumer protection and financial stability, adoption is set to skyrocket.
Interestingly, the legislation’s restrictions, particularly its ban on yield-bearing stablecoins, could stimulate activity in other areas of the crypto sector. While issuers hold interest-earning reserves like Treasury bills to back stablecoins, this interest cannot be passed on to holders.
This provision creates a notable challenge for institutions and sophisticated investors, who are often obligated by fiduciary duties to seek returns on their capital.
With regulated stablecoins unable to offer passive income, these substantial pools of institutional funds may be directed toward alternative avenues for generating returns.
Such a scenario allows decentralized finance to become a viable solution for those looking for yield-bearing opportunities.
Rerouting the Search for Yield
For some of the largest stablecoin issuers in the market today, the GENIUS Act’s ban on interest payments to holders has no impact on them.
“The largest stablecoins as USDT and USDC have never offered direct yield to their holders, as such there is no material change in this from the GENIUS Act,” Julio Moreno, Head of Research at CryptoQuant, told BeInCrypto.
However, the legislation does affect new entrants from doing so, protecting current offerings. Such a dynamic indirectly incentivizes investors to seek yield elsewhere.
“This could redirect investor capital toward decentralized platforms offering more transparent and potentially higher-return opportunities, such as lending protocols, liquidity pools, and tokenized real-world assets. As a result, DeFi may become the preferred destination for yield-seeking capital, especially when paired with clearer regulatory guidance,” Juan Pellicer, Head of Research at Sentora, added to the conversation.
The market is already reflecting this shift. Investors increasingly gravitate towards DeFi versions of stablecoins, such as Aave’s aUSDT or Ethena’s sUSDe. These enable stablecoins for staking or lending to generate yield within decentralized protocols.
Tokenized money market funds (MMFs), like those launched by BlackRock or Franklin Templeton, also emerge as a significant avenue for stablecoin yield.
Moreno highlighted that these staked stablecoins and tokenized MMFs have grown substantially, reaching a combined market capitalization of over $10 billion.
Instead of eliminating the demand for yield on stable assets, the GENIUS Act merely redirects it from stablecoins to other products. This redirection, however, has also brought a specific, increasingly important type of yield into the spotlight for institutional players.
DeFi’s Allure for Institutional Investors
As institutional investors increasingly seek avenues for yield in a post-GENIUS Act world, DeFi platforms provide compelling features that align with their needs.
“DeFi platforms offer institutional investors programmable yield, global liquidity, and access to innovative financial instruments, all underpinned by transparent smart contracts,” Pellicer stated, adding, “With the GENIUS Act laying groundwork for regulatory clarity, institutions are increasingly attracted to DeFi’s yield potential, provided it’s paired with robust risk management tools, on-chain audits and compliant custody solutions.”
This attraction is particularly geared towards what Pellicer terms “real yield” opportunities.
“These generate revenue streams from actual economic activity rather than token incentives,” he explained.
Key areas where these revenue streams generate the most include trading fees derived from activity on decentralized exchanges and the interest earned from overcollateralized lending platforms. DeFi primitives have also appeared as another option, offering unconventional yield structures, such as those in on-chain insurance.
“These models offer more sustainable returns and clearer risk profiles, aligning better with institutional risk frameworks,” Pellicer added.
However, not all experts agree on the new legislation’s direct implications for existing DeFi platforms.
Will Traditional Finance Compete with DeFi?
Eli Cohen, General Counsel at Centrifuge, suggested that even though the GENIUS Act prevents stablecoin issuers from paying interest, this doesn’t mean stablecoin holders cannot earn returns.
“Only the stablecoin issuer is blocked from offering yield, but others can do so, including now banks and broker-dealers. The GENIUS Act will expand the opportunities for stablecoins and not restrict them,” Cohen told BeInCrypto.
He also expressed skepticism that existing, permissionless DeFi platforms will become the primary destination for institutional capital seeking yield. Instead, new products will likely pop up.
“I think TradFi institutions will create mirror-regulated platforms to compete against and take market share from DeFi lending protocols like Aave,” he added.
However, the GENIUS Act’s indirect benefits will provide the most significant upside for DeFi and the broader crypto industry.
Banks as On-Ramps: A New Era of Adoption
DeFi adoption in the post-GENIUS Act era will thrive, but not thanks to investors seeking yield-bearing opportunities. Instead, the potential for a massive influx of new users will drive its proliferation.
“This will happen because US retail banks like JPM Chase and Citi will issue stablecoins and will have incentives to offer their depositors to use them. The number of retail bank account holders in the US is huge, and bringing only a portion of this market into the crypto space will be immensely important,” Cohen explained.
Beyond new users, Cohen identified a crucial political benefit. Once powerful US financial institutions actively participate in the crypto market as stablecoin issuers, they will be vested in promoting and expanding these markets.
“This will make it extremely difficult for a future US admin to go back to the open hostility of the Biden/Gensler era,” he added.
Under these circumstances, the future for DeFi and crypto in general seems bright.
A Certainty of Growth
Despite these differing views on the precise mechanisms of growth, experts have a clear consensus that the GENIUS Act will generate a significant expansion for the crypto ecosystem.
Whether through greater institutional engagement with “real yield” opportunities, the emergence of new bridges between traditional finance and DeFi, or a significant influx of new users via bank-issued stablecoins, DeFi’s future appears poised for substantial, possibly unexpected, expansion.
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