GENIUS' ban on stablecoin yield will drive demand for Ethereum DeFi — Analysts

The US fresh stablecoin legislation could create more demand for Ether and decentralized finance applications, which are primarily based on the Ethereum network, according to analysts.

The GENIUS bill, signed into law by US President Donald Trump on Friday, bans yield-bearing stablecoins, cutting off interest-earning opportunities for institutions and retail traders. This type of stablecoin generates interest or returns for the holder through yield-generating mechanisms, like staking or lending.

According to crypto analyst Nic Puckrin, the removal of yield on stablecoins “is great news for Ethereum-based DeFi as the main alternative for passive income generation."

Yield can be used for passive income but also to mitigate the effects of fiat inflation.

“The dollar is a depreciating asset without yield,” CoinFund President Christopher Perkins told Cointelegraph.“DeFi is where you can generate that yield to preserve value. And so I think stablecoin summer is going to turn into DeFi summer.”

Interest-bearing opportunities are attractive to retail participants, but critical for financial institutions that are beholden to shareholders and must generate cash flow or realize gains on capital assets to satisfy their fiduciary obligations to investors. 

This necessity could have major implications for decentralized finance and could drive more institutional capital into the crypto space, as these financial institutions chase yield onchain.

Entrenched interests fight against yield-bearing fiat-backed stableecoins

Speaking at the DC Blockchain Summit in March, US Senator Kirsten Gillibrand said that yield-bearing stablecoins could kill the traditional banking sector.

The senator argued that private stablecoin issuers passing on interest opportunities to customers would undermine the market for loans and crater demand for legacy banking services.

Gillibrand asked, “If there is no reason to put your money in a local bank, who is going to give you a mortgage?”

New York University professor Austin Campbell shot back against the banking industry in a May X post, claiming that traditional banks are threatened by yield-bearing stablecoins, because they can potentially erode banking profits. Campbell added that lawmakers advocating against interest-bearing tokens were engaging in “cartel protection.”

The increased competition from these yield-bearing fiat tokens will eventually displace traditional stablecoins altogether, according to Tether co-founder Reeve Collins.

“If you are trusting that both the fiat-backed and the synthetic are stable, then you're always going to be attracted to the one that gives you a higher yield,” Collins told Cointelegraph.