The U.S. Congress passed the Guiding and Establishing National Innovation for U.S. Stablecoins Act (“GENIUS Act”), which represents an important shift in the regulation of digital assets. Most importantly is the law’s explicit banning of payment stablecoin issuers providing any incentive or yield to stablecoin holders. This clause was intended to ensure that stablecoins are not bank deposits, and further ensures that stablecoins are not savings products and do not act as digital interest bearing accounts.
The act also defines “payment stablecoins” as digital tokens that are pegged to the dollar, have a redemption value of 1:1 and are used in everyday transactions. Under the law, only those entities subject to a federal or state prudential regulator (ex. banks or licensed trust companies) are eligible to issue these coins. The GENIUS Act also introduces stringent reserve support requirements: issuers would be required to maintain reserves equal to the value of their obligations in cash or short-duration U.S. Treasury securities, so as to eliminate risks comparable to those that contributed to previous algorithmic stablecoin failures.
Why prohibit interest payments?
Banking regulators and big banks claim that enabling stablecoins to provide yield would have catastrophic effects on the U.S. banking system. By offering a newer way to pay for things, along with higher interest rates than traditional check or savings accounts, interest-bearing stablecoins could quickly capture consumer deposits. This potential shift of funds could have a significant impact on conventional banks by taking away their source of funding, forcing them to increasingly rely on more volatile wholesale funding markets and limit their ability to lend.
The Federal Reserve and the Office of the Comptroller of the Currency (OCC) identified this risk in congressional testimony earlier this year, cautioning that if unaddressed, the growth of yield-bearing stablecoins might replicate financial crises in the past when depositors ran to what was seen as safer or more lucrative options, disrupting credit markets and stressing liquidity.
Legal differentiation from bank deposits
Beyond systemic risk, regulators emphasized that as stablecoins are not protected in the same way as bank accounts. They are not insured by the Federal Deposit Insurance Corporation (FDIC), and they are not subject to the same set of uniform banking laws managing capital adequacy or consumer protection. Allowing interest payments would complicate regulatory categories and suggest to consumers that stablecoins, by virtue of paying interest, would be the same as insured financial instruments.
The prohibition, in other words, performs both a functional and perceptual function–clarifying the bounds of stablecoins while preserving the special legal status of bank deposits under U.S. law.
Industry and innovation implications
The most aggressive advocacy for the interest ban came from major banks and their trade associations. Institutions such as JPMorgan Chase, Bank of America, and Fiserv presented detailed lobbying reports suggesting that stablecoin yield products would “disintermediate core financial intermediation.” Their position was that yield-bearing stablecoins could circumvent the regulatory costs and obligations that banks bear, leading to regulatory arbitrage and unfair competition.
They further warned that a growing stablecoin market with yield functionality would concentrate economic power in fintech platforms and exchanges, reducing the role of regulated banks in credit formation and risk evaluation.
Fintech disruption and DeFi migration
The perspective of fintech companies and blockchain consortia has been different. Industry actors like Circle, Paxos and Coinbase decried the bans as excessive and asserted that the demand from consumers for yield-bearing digital assets represents a shift in financial preferences that policymakers should embrace instead of stifle. They make the case that by outlawing interest payments, they are pushing users toward decentralized finance (DeFi) ecosystems where these types of instruments are unregulated and oftentimes opaque.
Already, they’re already attracting billions of dollars in deposits in the form of liquidity pools, lending pools, and staking. By prohibiting regulated stablecoin yields, the GENIUS Act may unintentionally increase activity by U.S. users to offshore or pseudonymous stablecoins, increasing–not decreasing–systemic risks.
Interoperability and legal certainty
Despite this pushback, some industry participants point out that the GENIUS Act adds clarity to the U.S. stablecoin regulatory space that has been severely lacking. The law creates uniform licensing processes, outlines what assets may be used to support reserves and why, and mandates the requirement for transparency disclosures such as monthly attestation of reserves and audits of on-chain activity.
However, there are still doubts about cross-border operability. In some major jurisdictions such as the European Union and Singapore, some forms of stablecoin interest are allowed, but strictly on a regulated basis. Without harmonization, U.S. firms would be at a competitive disadvantage, and foreign users would also reject U.S.-origin tokens in favor of more flexible tokens.
Balancing innovation and stability through law
Defenders of the GENIUS Act emphasized that the restrictions of the GENIUS Act are not designed to be anti-innovation, but instead a way to find a balance between technological progress and the needs for financial stability. One of the bill’s sponsors, Senator Pat Toomey, commented to the Senate during deliberations on the bill that stablecoins “should be used to make payments, not as investment vehicles.” His comments are a reflection of the core idea that payment infrastructure needs to be a focus on speed, efficiency and safety-not a focus on speculative returns.
The Federal Reserve has signaled that enforcement of the interest prohibition will include monitoring for indirect yield schemes, including affiliated platforms offering “rewards” or non-monetary incentives tied to stablecoin holdings. Such models may be considered de facto interest and brought under enforcement scrutiny, depending on implementation methods.
International perspectives on regulatory cohesion
The Financial Stability Board and the International Monetary Fund have both supported core aspects of the GENIUS framework, urging member states to implement clear distinctions between stablecoins and deposit-taking institutions. However, legal scholars warn that fragmentation of global approaches could lead to jurisdictional arbitrage, where issuers base operations in permissive environments while targeting U.S. consumers.
This issue is further compounded by the ongoing discussions around Central Bank Digital Currencies (CBDCs), which may eventually compete with both stablecoins and traditional banking services. The GENIUS Act’s limitations on interest-bearing features could give CBDCs a relative advantage if they are allowed to offer small-scale returns or incentives tied to monetary policy goals.
This person has spoken on the topic, underscoring the financial system implications of the regulation and the balancing act between innovation and systemic stability protections:
Their analysis reflects how policymakers must continue adapting frameworks in real time to keep pace with digital innovation and market expectations.
Navigating innovation, stability, and customer choice
The stablecoin interest prohibition GENIUS Act 2025 illustrates the deep challenges inherent in regulating emerging financial technologies. While the act offers guidance and security from system upheaval, it also limits specific product capabilities that serve as consumer demand generators and technological experimentation.
The struggle between novelty and control of risk is not exclusive to stablecoins, and will continue to define the overall development of the digital financial landscape. Where platforms innovate outside of regulatory boundaries and as consumers seek alternatives to traditional finance, the success of the GENIUS Act will rely not only on enforcement but also the future modifications to the law to stay aligned with market realities.
What remains to be seen is how adaptable its regulators can be to keep pace with continued technological evolution in money, markets, and trust, so as to ensure the U.S. reaches its objective of a safe, transparent, and globally competitive stable coin space-or at least does not abandon the field to offshore or unregulated models.
