The GENIUS Act and Yield-Bearing Stablecoins: What Crypto Lenders Need to Know

# The GENIUS Act and Yield-Bearing Stablecoins: What Crypto Lenders Need to Know

In July 2025, the GENIUS Act (Guiding and Establishing National Innovation for US Stablecoins) became law, creating the first comprehensive federal framework for stablecoin regulation in the United States.

For crypto lenders and borrowers, the GENIUS Act matters because it directly affects the stablecoins you use every day — USDC, USDT, and newer yield-bearing alternatives like YLDS.

What the GENIUS Act Does

The law establishes three core requirements for stablecoins:

1. Reserve backing: Stablecoins must maintain 1:1 reserve backing with high-quality liquid assets (cash, Treasuries, repos). No more algorithmic stablecoins (like the failed UST/Terra) operating without reserves.

2. Registration: Stablecoin issuers must register as Payment Processing Stablecoin Issuers (PPSIs) with either federal or state regulators.

3. Interest prohibition: PPSIs cannot pay interest or yield directly on their stablecoins to holders.

That third point is the one that matters most for crypto lending.

The Interest Prohibition — And Its Loopholes

The GENIUS Act's ban on interest-bearing stablecoins sounds like it should kill products like YLDS. But the market has grown, not shrunk — yield-bearing stablecoins expanded from $9.5 billion to over $20 billion after the Act passed.

Why? Several important nuances:

YLDS is a security, not a stablecoin. YLDS is registered with the SEC as a security under the Securities Act. It's not regulated as a stablecoin under the GENIUS Act — it's regulated as an investment product. Different legal framework, different rules. Figure designed it this way deliberately.

Affiliated platforms can offer yield. The Act prohibits the stablecoin issuer from paying interest on the stablecoin itself. But nothing prevents affiliated platforms from offering yield programs that use the stablecoin. This is how many existing programs continue to operate.

DeFi yield is untouched. Earning yield by lending USDC on Aave or Compound isn't interest from the stablecoin issuer — it's interest from borrowers in a lending protocol. The GENIUS Act doesn't regulate DeFi lending.

The DSR workaround. Spark Protocol's DAI Savings Rate (DSR) pays yield set by MakerDAO governance, not by a stablecoin issuer. Since MakerDAO is a decentralized protocol, not a PPSI, the prohibition doesn't apply.

Impact on the Crypto Lending Ecosystem

What Changes

Stablecoin reserves are safer. The 1:1 reserve backing requirement with high-quality assets means USDC and USDT are now legally required to hold the reserves they claim. For crypto lenders, this reduces stablecoin depeg risk — a significant concern since the USDC depeg incident during the SVB crisis.

CeFi platforms face scrutiny. Platforms that offer "earn" programs on stablecoins — like Nexo's interest accounts — need to ensure they're not running afoul of the interest prohibition. Most operate under securities law exemptions or as lending programs (not stablecoin interest), but the legal landscape is being actively tested.

Regulatory clarity attracts capital. Paradoxically, regulation is bullish for the stablecoin market. Institutional treasuries and corporate finance departments that were hesitant to use stablecoins now have a federal framework to evaluate. Total stablecoin market cap has continued to grow post-GENIUS Act.

What Doesn't Change

DeFi lending yields are unaffected. Earning yield by depositing USDC into Aave, Compound, or Morpho is lending, not stablecoin interest. The GENIUS Act's interest prohibition doesn't reach DeFi protocol yields.

Crypto-backed borrowing continues. Borrowing USDC against BTC or ETH collateral through any platform — DeFi or CeFi — is not impacted by stablecoin regulation.

Tokenized Treasuries operate separately. Products like Ondo's OUSG and BlackRock's BUIDL are regulated as securities, not stablecoins. The GENIUS Act doesn't apply to them.

The Yield-Bearing Stablecoin Landscape Post-GENIUS Act

The market has effectively created a two-tier system: regulated non-yielding stablecoins (USDC, USDT) for payments and trading, and separately regulated yield-bearing products (YLDS, OUSG, sDAI) for earning returns.

What to Watch in 2026

State vs. federal jurisdiction. The GENIUS Act allows states to regulate stablecoin issuers with up to $10 billion in circulation. Larger issuers fall under federal oversight. How this dual system plays out will affect the competitive landscape.

Enforcement actions. The SEC and banking regulators will likely bring enforcement cases that test the boundaries of the interest prohibition. Watch for cases involving platforms that blur the line between stablecoin yield and lending income.

European parallel. The EU's MiCA regulation provides a different but related framework for stablecoin regulation. Cross-border stablecoin usage will need to navigate both regimes.

Yield-bearing stablecoin growth. Despite — or perhaps because of — the prohibition, the market for SEC-registered yield products (YLDS, OUSG) and DeFi yield alternatives (sDAI, USDe) will likely continue growing as investors seek returns on dollar-denominated holdings.

Further Reading

• YLDS Stablecoin Guide — The first SEC-registered yield-bearing stablecoin
• Stablecoin Lending Guide — How to earn yield on USDC, USDT, and DAI
• SEC Tokenized Securities Guidance — Regulatory framework for tokenized assets
• Ondo Finance Review — OUSG and USDY as alternatives
• Is Crypto Lending Safe? — Risk assessment framework

Disclaimer: This article is for educational purposes only and does not constitute legal or financial advice. Stablecoin regulation is evolving. Consult qualified legal professionals for guidance on specific regulatory compliance questions.