Stablecoin Yield Restrictions May Drive Capital Offshore, Warns Expert

• Stablecoin yield restrictions may drive capital offshore, warns market expert.
• US regulations could push investors towards synthetic, unregulated financial structures.
• Global competition intensifies as US stablecoin yield ban gains traction.

Proposed regulations under the US CLARITY Act could lead to significant consequences for regulated financial markets. According to Colin Butler, head of markets at Mega Matrix, restrictions on stablecoin yields could push capital out of regulated markets and into opaque, unregulated financial structures. Butler explained that banning compliant stablecoins from offering yield does not safeguard the US financial system. Instead, it risks sidelining regulated institutions while accelerating capital migration beyond US oversight.

Stablecoins such as USDC, which are fully backed by cash or short-term Treasuries, are prohibited under the newly enacted GENIUS Act from offering interest directly to holders. These payment stablecoins are treated as digital cash rather than financial products capable of generating yield. Butler pointed out that this creates a structural imbalance, especially given that short-term Treasuries currently yield around 3.6%, while traditional savings accounts offer much lower rates. This regulatory shift could push investors toward exchanges that offer higher yields on stablecoin deposits, ultimately drawing capital away from traditional banks.

In addition, Butler highlighted that the competitive dynamic between banks and stablecoins isn’t based on a direct comparison between stablecoins and bank deposits. Rather, it’s the discrepancy between low bank deposit rates and the higher yields available through stablecoin investments. The financial incentive for investors to move capital is clear when stablecoins can offer 4% to 5% yields, compared to near-zero yields at banks.

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The Risk of Unregulated Synthetic Dollars

Experts also warned of the potential rise in demand for synthetic dollars—dollar-pegged instruments that maintain parity through structured trading strategies, rather than by holding fiat reserves. Andrei Grachev, founding partner at Falcon Finance, emphasized that the real danger lies not in synthetics themselves but in unregulated synthetic structures that operate without transparency. A notable example of this is Ethena’s USDe, which generates yield through crypto collateral and perpetual futures. Such products occupy a regulatory gray area, falling outside the scope of the GENIUS Act’s definition of payment stablecoins.

Butler further stressed that Congress’s efforts to protect the banking system may inadvertently accelerate the migration of capital into structures that are largely outside US regulatory control. This would not only reduce transparency but also risk the capital being held in offshore, opaque financial environments, beyond the reach of US regulators.

Global Implications of Yield Restrictions

The potential global impact of these restrictions on US stablecoins could have far-reaching consequences. Butler argued that the US may find itself in direct competition with countries like China, where the digital yuan has already become interest-bearing. Furthermore, nations such as Singapore, Switzerland, and the UAE are actively developing frameworks for yield-bearing digital instruments. If the US enforces a ban on yield-bearing stablecoins, global capital may choose to flow toward interest-bearing currencies outside of the US jurisdiction, particularly those offered by China.

Grachev also expressed concern that the US could lose its leadership in the development of transparent, compliant yield products. The current approach under the CLARITY Act could send the wrong message by treating all yield products the same, without recognizing the distinction between regulated, transparent structures and less regulated alternatives.

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