Author: Ben Nadareski

Source: Coindesk

Compiled by: Shaw Golden Finance

Summary

  • The U.S. Congress is about to pass the (GENIUS Act), a significant cryptocurrency bill that will regulate stablecoins and prohibit them from paying interest.

  • The bill 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) toward more transparent and sustainable financial practices.

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

At first glance, the (GENIUS Act) seems to be a direct regulatory victory. It will ultimately provide legitimate development space for over $120 billion of fiat-backed stablecoins, establishing clear norms for compliant payment stablecoins.

But a deeper dive into the details reveals that this is not a full go-ahead. In fact, under the stringent requirements of the law — independent reserves, high-quality liquid assets, and generally accepted accounting principles

(GAAP) proof — currently, only about 15% of stablecoins can truly meet the requirements.

More notably, the bill explicitly prohibits stablecoins from paying interest or yields. This is the first time U.S. lawmakers have clearly distinguished stablecoins as payment instruments from stablecoins as yield 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.

Mandatory halt on yield-bearing stablecoins

For years, DeFi has attempted to have the best of both worlds: to provide seemingly 'stable' assets while quietly generating yields, all while avoiding securities regulation. The (GENIUS Act) has broken this ambiguity. Under the new legislation, any stablecoin that generates yield directly through staking mechanisms or indirectly through pseudo-decentralized financial savings accounts is now clearly outside the compliance scope. In short, yield-bearing stablecoins have been abandoned.

Congress sees this as a way to protect U.S. banks. By prohibiting stablecoins from generating interest, legislators hope to prevent trillions of dollars from flowing out of traditional deposits, as these deposits provide loan guarantees for small businesses and consumers. Keeping stablecoins non-yielding helps maintain the fundamental architecture of the U.S. credit system.

But a deeper transformation is taking place. 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 securities and currency

According to the (GENIUS) Act, all compliant stablecoins must be backed by cash and short-term Treasury securities with a maturity of 93 days or less. This effectively tilts the reserve strategy of cryptocurrencies towards short-term U.S. Treasury instruments, connecting DeFi with U.S. monetary policy more closely than most would care to admit.

We are talking about a tradable bond market currently worth about $28.7 trillion. Meanwhile, the circulation of the stablecoin market has exceeded $250 billion. Therefore, even if only half of that (around $125 billion) turns to short-term Treasury securities, it signifies a major shift, injecting cryptocurrency liquidity directly into the U.S. debt market.

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

This represents a new type of monetary reflexivity: DeFi now fluctuates in sync with the health of the Treasury market. This provides both stabilizing effects and new sources of systemic risk.

Why this may be the healthiest moment for DeFi

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

Due to the inability to embed yield directly into stablecoins, protocols are forced to build yield from external sources. This means using neutral strategies, capital arbitrage, dynamic hedge staking, or opening liquidity pools for 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 lead to 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 the regulatory fence, hoping that the shadow currency market can support them.

Most entrepreneurs underestimate the speed at which the cryptocurrency market is repricing regulatory risks. In traditional finance, policy determines the cost of capital. In the DeFi space, policy will now dictate the channels for obtaining capital. 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

(GENIUS Act) is not the end of DeFi, but it does break 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, requiring collateral, disclosures, and rigorous stress testing.

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

In the long run, this may be one of the best things for the industry ever.