GENIUS Act Pushes Capital from Stablecoins to Ethereum DeFi

Key Takeaways

• A sweeping U.S. law bans yield-bearing stablecoins, prompting a flight to Ethereum-based DeFi for yield-hungry investors.
• Ethereum DeFi is expected to benefit significantly from this restriction.
• Financial institutions may shift to DeFi to generate cash flow and fulfill fiduciary duties to investors.
• Traditional banks fear yield-bearing stablecoins could erode their profit margins.
• Without yield from stablecoins, investors are expected to shift toward DeFi yield opportunities. 

The new U.S. stablecoin law may increase demand for Ether (ETH) and decentralized finance (DeFi) applications, which mostly run on the Ethereum network, according to analysts.

The GENIUS Act, signed into law by U.S. President Donald Trump on Friday, bans yield-bearing stablecoins, cutting off a source of passive income for institutions and retail traders. These types of stablecoins generate interest or yield for holders via mechanisms such as staking or lending.

According to crypto analyst Nic Puckrin, removing yields from stablecoins “is good news for Ethereum DeFi as it’s the primary alternative for generating passive income.”

Yield can be used for passive income or as a hedge against fiat inflation.

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

Ethereum accounts for the majority of total value locked (TVL) in the DeFi sector.

Yield opportunities are attractive to retail participants but even more critical to financial institutions responsible to shareholders, who must generate cash flow or returns on capital assets to meet fiduciary obligations.

This could have major implications for decentralized finance and may drive more institutional capital into the crypto space as firms pursue onchain yield.

The Banking Sector Pushes Back on Yield-Bearing Stablecoins

At the DC Blockchain Summit in March, U.S. Senator Kirsten Gillibrand warned that yield-bearing stablecoins could “kill traditional banking.”

She argued that private stablecoin issuers passing interest opportunities to customers would undermine lending markets and reduce demand for legacy banking services.

“If there’s no reason to deposit money in your local bank, who’s going to lend you money for a home?” Gillibrand asked.

NYU Professor Austin Campbell countered the banking industry’s stance in a May X post, claiming traditional banks feel threatened by yield-bearing stablecoins because they erode banking profits. He added that lawmakers opposing yield-generating tokens are essentially “protecting the cartel.”

Rising competition from yield-bearing fiat tokens may eventually replace traditional stablecoins altogether, according to Tether co-founder Reeve Collins. As yield becomes the defining feature of value storage, DeFi platforms may not just benefit, they could become essential.

“If you believe both fiat-backed and synthetic stablecoins are stable, you’ll always be drawn to the one that offers a higher yield,” Collins stated.