Why does GENIUS Act prohibit stablecoins from paying interest? What is the legislative motivation behind this rule?
The zero-yield rule's core legislative motivation is the 'regulatory classification boundary' problem — not user protection. The U.S. financial regulatory system has completely different frameworks for 'payment instruments' and 'investment products': payment instruments (cash, debit cards, prepaid cards) are governed by bank regulators (OCC, FDIC) or money services business regulators, with relatively lower thresholds; investment products (money market funds, deposit accounts, bonds) are strictly governed by the SEC, including investor protection provisions, disclosure requirements, product sales restrictions, etc.
If stablecoins begin directly paying interest to holders, their function highly overlaps with money market funds — under the SEC's Howey Test analytical framework, interest-paying stablecoins would likely be defined as 'investment contracts,' thus classified as securities. Once classified as securities, Stablecoin issuers would need to meet the SEC's full compliance requirements (S-1 IPO-level disclosure, broker-dealer licenses, etc.), making the core use case of 'fast, low-cost stablecoin payments' practically impossible to implement. So GENIUS Act's zero-yield rule 'nails stablecoins to the payment instrument framework' in exchange for clearer, lower compliance thresholds — sacrificing the possibility of direct interest payment in exchange for regulatory permission for stablecoins to circulate widely as payment instruments.
How does DeFi Stablecoin yield (sUSDS, sUSDe) legally circumvent the 'no interest to holders' prohibition? Does this structure face regulatory risk?
DeFi yield stablecoins' legal logic for circumventing the zero-yield prohibition is a 'two-step exchange': your USDC (issued by PPSI issuer Circle) → transferred into Sky Protocol's Smart Contract → exchanged for sUSDS (a DeFi token issued by Sky Protocol itself) → sUSDS generates yield.
Key legal point: Circle (PPSI issuer) pays no interest throughout the entire process. The moment you deposit USDC, it has left Circle's liability scope and entered Sky Protocol — an independent DeFi protocol. Sky Protocol is not a PPSI, not subject to GENIUS Act's 'no interest to holders' prohibition; its payment of sUSDS yield doesn't count as 'PPSI paying stablecoin holders interest' under the current legal framework.
Regulatory risk: this structure is currently legal within GENIUS Act's interpretive scope, but future regulatory interpretation may extend broader regulatory frameworks to 'DeFi protocol stablecoin yield mechanisms.' The SEC's standard for determining whether DeFi protocols constitute securities continues evolving — if sUSDS were ever determined to be an 'investment contract/security,' the entire structure's legal foundation would need reassessment. Currently legal, but staying attentive to regulatory developments is warranted.
If future GENIUS Act enforcement makes USDT difficult to use in U.S. institutional markets, what does this mean for ordinary users holding USDT?
Short-term impact (1–2 years): limited impact on ordinary USDT holders. USDT's primary use cases are currently crypto trading in Asia and emerging markets (USDT/BTC and USDT/ETH pairs have the deepest liquidity) and cross-border payments — these scenarios aren't directly governed by GENIUS Act in the short term, as GENIUS Act primarily governs stablecoins 'issued and used in the U.S.'
Medium-term impact (3–5 years): if U.S. institutional investors (banks, public company treasury departments) shift heavily to USDC, this may indirectly reduce USDT's liquidity depth in some DeFi protocols and exchanges. But USDT's emerging market dominance (especially Middle East, Latin America, Southeast Asia) won't disappear due to U.S. regulation.
Recommendations for ordinary users: if your Stablecoin primary use is trading on U.S. regulated platforms (Coinbase, Kraken, Gemini), USDC's compliance advantage is already more pronounced. If your primary use case is Asian exchanges (Binance, OKX) or DeFi Liquidity Mining, USDT's usability in the foreseeable future won't be materially affected.
As an ordinary user under GENIUS Act's framework, how should I choose between holding USDC, USDS, or both?
Under GENIUS Act's framework, 'which Stablecoin to hold' and 'where to store the stablecoin' are two independent decisions.
Which stablecoin to hold — selection logic: USDC — if you primarily operate on U.S. regulated platforms (Coinbase, Kraken, Gemini, compliant DeFi protocols) and need maximum legal clarity and institutional acceptance, USDC is the default optimal choice. USDS — if you primarily use Sky Protocol's DeFi ecosystem (SSR, Spark, Sky Markets), USDS is the native token with the best integration within that ecosystem. USDT — if you primarily use Asian exchanges and need deep liquidity for large trades, USDT's usability is currently still broader.
Where to store stablecoins — selection logic (determines your actual yield): the zero-yield rule means 'choosing the stablecoin' itself no longer determines your yield; what determines yield is which protocol you put your stablecoin in. USDC deposited into sky.money's SSR → 8.5% annualized; USDC deposited into Aave V4 → 5–7% annualized; USDC left in Coinbase → 0% annualized. After choosing a stablecoin, 'choosing the protocol' is the key step determining your actual yield — this is the decision dimension most worth spending time understanding in the GENIUS Act era.
If you've ever asked 'why doesn't Circle just distribute USDC reserve interest to USDC holders' or 'why does OUSD say it'll share revenue with Visa and Mastercard but not directly to regular users' — the answer to both points to the same legal provision: GENIUS Act's 'Zero-Yield Requirement.' The 2025 GENIUS Act set a regulation that appears simple but has far-reaching impact: regulated stablecoins (Permitted Payment Stablecoin, PPSI) cannot directly pay interest or any form of yield to holders. This regulation appears to 'protect users from being exposed to promised yield risks,' but it also shapes the logic of the entire stablecoin competitive landscape.
GENIUS Act's zero-yield requirement (Section 9) states: 'A Permitted Payment Stablecoin Issuer shall not pay interest or other yield with respect to a Permitted Payment Stablecoin to a holder, whether paid directly or indirectly through any arrangement.' The core intent of this provision is to distinguish two different financial product categories: 'Payment Instrument' — stablecoins should function like cash or debit cards, used for payment and transfer, and shouldn't carry yield promises; 'Investment Product' — money market funds, deposit accounts, bonds — these products promise returns and are strictly governed by the SEC or bank regulators. If stablecoins begin directly paying interest to holders, they highly overlap with money market fund functions — from the SEC's perspective, this could cause stablecoins to be classified as 'securities,' falling under an entirely different (and stricter) regulatory framework. To avoid this classification problem, GENIUS Act directly prohibits regulated stablecoins from paying interest. Note: zero-yield requirements only apply to 'Permitted Payment Stablecoins' — i.e., regulated stablecoins qualified as PPSI under GENIUS Act (like future USDC, PYUSD). Tether's USDT, if not seeking PPSI qualification, isn't subject to this restriction (but also can't be used by U.S. regulated institutions). DeFi protocols themselves (Aave, Compound, Sky's SSR mechanism) aren't issuers directly paying stablecoin holders interest — they're independent financial applications, and these protocols' yield mechanisms are currently outside PPSI's 'no interest payment' prohibition scope.
On June 30, 2026, the Open Standard consortium (Visa, BlackRock, Stripe, 100+ institutions) announced OUSD, with one of its core selling points being 'sharing most reserve interest with alliance partners.' Many people's first reaction to this description was: 'Can users directly receive interest?' The answer is: no — at least not under the premise of OUSD seeking to become a regulated PPSI stablecoin. OUSD's revenue-sharing design circumvents the 'direct holder interest payment' prohibition by taking the path of 'distributing benefits to distribution partners' — Visa, receiving a portion of OUSD reserve interest, has an incentive to integrate OUSD into its payment network and offer merchants better rates; ultimately this benefit may indirectly reach users as 'lower merchant fees' or 'better payment terms,' but not as direct APY payments. This design is compliant because OUSD's interest flows to 'business partners serving as distribution channels' rather than 'direct stablecoin holders' — the former is commercial cooperation; the latter is prohibited by GENIUS Act's 'paying holders interest.' Circle's USDC, facing OUSD competition, saw Allaire hint at a similar path: 'making partners economic stakeholders in USDC network growth' — likely also achieved through a structure of 'distributing benefits to distribution partners' rather than 'directly paying USDC holders interest.'
So, earning 8.5% SSR yield by depositing USDC on sky.money, or earning 10–15% annualized on Ethena's sUSDe — does this violate the zero-yield rule? The answer is no — because these yields' legal structures are completely different from 'stablecoin issuers directly paying interest.' DeFi yield's legal logic: you deposit USDC into Sky Protocol's Smart Contract, receiving sUSDS. sUSDS isn't USDC — it's Sky Protocol's own 'liquidity accrual token,' its appreciation coming from Sky Protocol's lending business and RWA investment composite yields, distributed to sUSDS holders through Sky Protocol's own protocol. Legally, you're depositing USDC into a DeFi protocol (similar to putting money in an investment fund), not 'holding USDC and receiving interest from Circle.' Circle never directly pays you anything — your USDC first exits the Circle layer, then generates yield at the DeFi protocol layer. This two-step flow lets sUSDS yields circumvent GENIUS Act's 'no interest to holders' prohibition — because Circle (PPSI issuer) never pays interest; it's Sky Protocol (independent DeFi protocol) paying yield, and DeFi protocols currently aren't in the PPSI regulatory category. This also explains why after GENIUS Act passed, DeFi yield stablecoins (sUSDS, sUSDe) weren't directly impacted — their legal architecture naturally avoids the zero-yield prohibition.
Tether's USDT is an interesting special case. Currently Tether hasn't sought PPSI qualification under GENIUS Act, so legally Tether isn't directly bound by the 'zero-yield rule.' But this choice also comes with costs: USDT without PPSI qualification can't be formally used in U.S. federally regulated banks and financial institutions. U.S. major banks, public company treasury departments, and institutional investors who want to use stablecoins within compliance frameworks can only choose PPSI-approved stablecoins (like USDC), not USDT. Tether's short-term strategy appears to be maintaining its dominance in emerging markets and offshore trading (where GENIUS Act's requirements don't directly apply), while waiting for clearer U.S. regulatory framework before deciding on strategic adjustments. But if GENIUS Act enforcement directs more institutional capital toward PPSI stablecoins, Tether's long-term market share pressure will increasingly mount.
For ordinary stablecoin users, GENIUS Act's zero-yield rule brings these practical impacts. The USDC you hold still pays no interest — this isn't 'Circle being stingy,' it's a legal design required by GENIUS Act. If you want stablecoins to generate yield, you need to actively deposit them into a DeFi protocol (sky.money's SSR, Ethena's sUSDe, Aave's deposit pool) rather than simply holding USDC waiting for Circle to pay interest. After OUSD launches, you also won't directly receive annualized interest from OUSD — but if Visa receives OUSD reserve yield and offers lower fees to merchants settling in OUSD, this benefit may indirectly lower your payment costs as a consumer. This is the 'yield relayed to users via distribution partners' indirect path. When choosing stablecoins, the zero-yield rule means 'all PPSI stablecoins have zero nominal yield' — Real Yield differences aren't in the stablecoin itself, but in where you put the stablecoin (which DeFi protocol, which lending platform). After choosing a base stablecoin (USDC or USDS), which protocol to use in is the key determinant of your actual yield.