From Zero Yield to Interest-Bearing: The Regulatory Shift Reshaping Stablecoins

Stablecoin issuers earned over $10 billion in 2025 from reserve income that holders never saw. Tether alone reported profits exceeding that figure, generated almost entirely from US Treasury holdings backing USDT. Circle's reserve income hit $733 million in Q4 2025 alone. Holders of these stablecoins received exactly zero percent of the yield their deposits generated.

That asymmetry is now the central fault line in stablecoin regulation. The GENIUS Act, signed into law on July 18, 2025, codified the no-yield rule for permitted payment stablecoins. But instead of settling the question, the law triggered an explosion of yield-bearing stablecoins that operate outside its framework: 88 new yield-bearing stablecoins launched in 2025, and the category grew roughly 300% that year. The regulatory shift is not just opening the door for interest-bearing stablecoins. It is splitting the entire market in two.

How Stablecoin Issuers Built a $10 Billion Business

The traditional stablecoin business model is simple: accept dollar deposits, issue tokens 1:1, invest the reserves in short-duration US Treasuries and money market instruments, and keep all the yield. Holders get price stability and on-chain transferability. Issuers get a spread on billions of dollars in deposits with no obligation to share returns.

The scale of this model became clear in 2025. Tether held $141 billion in US Treasury exposure by year-end, making it the 17th-largest holder of US government debt globally. Its full-year profit exceeded $10 billion with $6.3 billion in excess reserves. Circle, which went public in June 2025 at a $16 billion valuation, reported $2.7 billion in total revenue for the year, with reserve income accounting for roughly 69% of Q4 revenue.

With the total stablecoin market cap reaching approximately $320 billion by April 2026, the aggregate reserve income flowing to issuers likely exceeded $15 billion annually. For context, that is more than many regional banks earn.

The core tension: Stablecoin holders provide the capital that generates yield, but regulation has historically prevented issuers from sharing it. If a stablecoin pays interest, regulators argue it starts to look like a security or a bank deposit, triggering requirements that most crypto-native issuers cannot meet.

The GENIUS Act: Codifying the Yield Ban

The Guiding and Establishing National Innovation for US Stablecoins Act passed the Senate 68-30 on June 17, 2025, cleared the House 308-122 on July 17, and was signed into law the next day. Its full regulatory framework takes effect approximately November 2026, 18 months after signing.

Section 4(a)(11) contains the provision that defines the current landscape. It states that no permitted payment stablecoin issuer “shall pay the holder of any payment stablecoin any form of interest or yield (whether in cash, tokens, or other consideration) solely in connection with the holding, use, or retention of such payment stablecoin.”

The Act establishes a dual-track regulatory system. Issuers with under $10 billion in outstanding stablecoins may opt for state regulation if state standards are “substantially similar” to federal requirements. Issuers exceeding $10 billion must transition to federal oversight under the OCC within 360 days. Both tracks prohibit yield payments to holders.

The Coinbase-Shaped Hole

The yield ban applies to issuers, not to exchanges or platforms. This distinction created what analysts have called the “Coinbase-shaped hole” in the legislation. Coinbase offers approximately 4% yield on USDC to its users, funded by a revenue-sharing agreement with Circle on reserve income. Because the issuer (Circle) is not directly paying yield to holders, this arrangement technically falls outside the prohibition.

The structure works like this: Circle invests USDC reserves and earns yield. Circle shares a portion of that yield with Coinbase under a distribution agreement. Coinbase then passes some of that revenue to users as “USDC Rewards.” At no point does the issuer pay the holder directly, so the letter of Section 4(a)(11) is arguably satisfied.

OCC Rulemaking: Closing the Loophole

The OCC moved to address this gap with a Notice of Proposed Rulemaking published in March 2026. The proposed rules expand the yield prohibition beyond issuers to affiliates and third parties, creating a rebuttable presumption that affiliate and third-party yield arrangements constitute prohibited interest payments.

The comment period closed on May 1, 2026. If finalized as proposed, the rules would effectively close the Coinbase loophole and force a harder separation between payment stablecoins and yield-bearing instruments. The final rule is expected alongside the GENIUS Act's full effective date in late 2026.

The CLARITY Act: Extending the Ban Further

The Digital Asset Market Clarity Act addresses stablecoin yield through Section 404. The House passed its version on July 17, 2025, and the Senate Banking Committee approved a companion bill in May 2026. Full Senate passage remains pending.

Section 404 goes further than the GENIUS Act in two ways. First, it bans “passive yield,” defined as rewards earned simply for holding a stablecoin. Second, it extends the prohibition beyond issuers to “any digital asset service provider,” directly targeting the exchange-intermediary model that Coinbase uses.

The provision does carve out narrowly defined “activity-based rewards” tied to payments and platform usage, but joint rulemaking from the SEC, CFTC, and Treasury would govern what qualifies. In July 2026, 78 US banking organizations sent a joint letter to Senate leadership arguing that Section 404's language is still not strong enough to prevent stablecoins from functioning as bank-deposit substitutes.

For a detailed comparison of how these two bills interact, see the CLARITY Act stablecoin yield rules analysis.

SEC Guidance: Where Yield Crosses Into Securities

The SEC's Division of Corporation Finance issued staff guidance on April 4, 2025, clarifying that certain dollar-backed stablecoins do not constitute securities. The qualifying criteria include maintaining a 1:1 USD peg, offering 1:1 redemption, and holding reserves in low-risk liquid assets.

The guidance explicitly does not cover yield-bearing stablecoins. The SEC's March 2026 comprehensive crypto asset taxonomy, issued jointly with the CFTC, confirmed that GENIUS Act-compliant payment stablecoins are not securities while “expressly reserving that other types of stablecoins and related arrangements may constitute securities, depending on the facts.”

The implication is clear: a stablecoin that pays yield to holders may satisfy the Howey test for an investment contract. Holders deposit money with a reasonable expectation of profit derived from the efforts of others (the issuer managing reserves). This is precisely why Figure Markets chose to register its yield-bearing stablecoin, YLDS, as a public security with the SEC.

The Emerging Yield-Bearing Stablecoin Landscape

While payment stablecoins face a yield prohibition, a parallel market of interest-bearing stablecoins is growing rapidly outside that framework. These instruments use different mechanisms to pass yield to holders, and they accept different regulatory classifications to do so.

Registered Security: Figure Markets YLDS

YLDS, launched in February 2025, is the first SEC-registered yield-bearing stablecoin. Issued by Figure Certificate Company on the Provenance Blockchain, it offers approximately 3.8% APY calculated as SOFR minus 50 basis points, accruing daily and paying monthly. Reserves are invested in the same instruments as prime money market funds.

By registering as a public security, YLDS operates with full regulatory clarity. It is available to both US retail investors and institutions, and it is transferable peer-to-peer. The tradeoff: it carries all the compliance overhead of a registered security, including ongoing SEC reporting requirements.

Savings Rate Pass-Through: Sky sUSDS and sDAI

The Sky protocol (formerly MakerDAO) pioneered the savings rate model. Users deposit USDS or DAI into a savings contract and receive sUSDS or sDAI, which appreciates in value as protocol revenue accrues. The Sky Savings Rate sat at 3.75% as of Q2 2026, with sDAI delivering approximately 5.48% APY over the prior year. Total value locked in DSR-linked deposits reached roughly $1.32 billion.

This model avoids the securities question through DeFi protocol design: yield comes from protocol operations (lending revenue, liquidation fees) rather than from an issuer managing reserves. Whether regulators will ultimately treat this distinction as meaningful remains an open question.

Borrow-Mint Model: Aave GHO

The GHO stablecoin uses a different approach. Users post collateral in Aave and mint GHO at a governance-set borrow rate. Yield products built on top, like sGHO (Savings GHO), offer approximately 5.6% APY with instant liquidity. A staked variant, stkGHO, targets higher yields around 8.4% but carries slashing risk. GHO's circulating supply exceeded 580 million tokens by March 2026, deployed across Ethereum, Arbitrum, Base, and Avalanche.

Basis Trade: Ethena USDe

Ethena's USDe is a synthetic dollar backed by a delta-neutral basis trade: long staked ETH collateral, short equivalent ETH perpetual futures. Yield comes from funding rate payments (shorts collect from longs when perpetuals trade above spot) plus ETH staking yield. The staked variant sUSDe delivered yields ranging from 4% to 30% across 2024-2025, though rates compressed to high single digits by Q2 2026.

With a supply of approximately $5.5 billion, USDe is the largest crypto-collateralized synthetic dollar. It is also the most volatile yield source: APY can briefly flip negative during bearish sentiment when funding rates invert.

Tokenized Treasuries: Ondo USDY

Tokenized Treasury products represent a more conservative yield mechanism. Ondo's USDY is backed by short-duration US Treasuries and bank deposits held through Morgan Stanley. The token trades at a rising premium to $1.00, accruing yield at approximately 4.65% APY as of April 2026. Supply reached $740 million across Ethereum, Solana, Mantle, Sui, and Aptos.

Comparing Yield-Bearing Stablecoin Models

How the Yield Ban Reshapes Issuer Business Models

The regulatory bifurcation creates distinct strategic paths for stablecoin issuers, each with different margin profiles and competitive dynamics.

Path 1: Payment Stablecoin (No Yield, Not a Security)

Under this model, issuers retain all reserve income. Tether's $10 billion in 2025 profit demonstrates the ceiling. But the margin depends entirely on attracting and retaining deposits without offering yield. As yield-bearing alternatives proliferate, payment stablecoins must compete on other dimensions: liquidity, network effects, regulatory clarity, and integration breadth.

If the OCC's proposed rules close the third-party yield loophole, even the Coinbase-Circle revenue sharing model may need restructuring. Payment stablecoins would then compete purely on utility, pushing issuers toward deeper integration with payment rails, settlement infrastructure, and merchant networks rather than yield differentiation.

Path 2: Yield-Bearing Instrument (Interest, Regulated as Security)

Registering as a security allows issuers to pay yield legally but introduces compliance costs: SEC reporting, broker-dealer relationships, and restrictions on who can hold and transfer the token. YLDS demonstrated this path is viable, but the addressable market shrinks compared to unrestricted payment stablecoins.

Path 3: DeFi Protocol (Yield via Smart Contract, Regulatory Gray Zone)

Protocols like Sky, Aave, and Ethena generate yield through on-chain mechanisms rather than issuer-managed reserves. This sidesteps the GENIUS Act's issuer-focused prohibition but leaves these products in regulatory uncertainty. If the CLARITY Act's Section 404 passes with its broader service-provider ban, DeFi yield products could face new restrictions.

Margin Impact by Path

The existential question for Tether and Circle: If Tether's $184 billion in USDT liabilities had to pass through even half of the roughly 5% reserve yield, that would represent approximately $4.6 billion per year, nearly eliminating their current profit margin. The yield ban is not just a regulatory detail. It is the economic foundation of the two largest stablecoin businesses.

State-Level Experiments

States are testing their own approaches to stablecoin regulation. Wyoming launched the Frontier Stable Token (FRNT) on August 19, 2025: the first state-issued stablecoin. It holds 102% reserve backing in cash and short-term US Treasury bills. Rather than passing yield to token holders, Wyoming is evaluating whether to direct reserve interest income toward funding state schools.

New York's Department of Financial Services supervises dollar-pegged stablecoins through its limited-purpose trust charter framework, used by Paxos and Gemini. Illinois explicitly excludes algorithmic and yield-bearing stablecoins from its licensable category, mirroring the federal exclusions.

The GENIUS Act allows state regulation below the $10 billion threshold if state standards are “substantially similar” to federal requirements. Above $10 billion, federal oversight under the OCC becomes mandatory, creating a natural graduation path for successful state-level experiments.

What This Means for Bitcoin-Based Payment Infrastructure

The bifurcation between payment stablecoins and yield-bearing instruments has direct implications for how stablecoins are integrated into payment applications built on Layer 2 protocols.

Payment stablecoins like USDT and USDC will increasingly compete on settlement speed, cost, and integration density rather than yield. Networks that offer instant, low-cost settlement become more valuable as yield differentiation disappears from the payment stablecoin layer. This is precisely the environment where Spark operates: instant transfers with Bitcoin-grade self-custody and native stablecoin support through tokens like USDB.

Yield-bearing stablecoins, meanwhile, open new possibilities for wallet applications. A Bitcoin-based payment app could let users hold a yield-bearing instrument while idle, then convert to a payment stablecoin at the moment of transaction. The regulatory framework is making this two-token model not just technically possible but economically rational: earn yield between payments, settle instantly when paying.

For developers building on Spark, the SDK already supports native token operations that could facilitate these patterns. Wallets like General Bread demonstrate how Spark-powered applications can integrate stablecoin functionality with Bitcoin self-custody.

What Comes Next

Several regulatory milestones will determine how the interest-bearing stablecoin market evolves through the rest of 2026 and beyond.

• The GENIUS Act's full regulatory framework takes effect in approximately November 2026, establishing concrete compliance requirements for permitted payment stablecoin issuers.
• The OCC's final rulemaking on the yield prohibition, expected to accompany the GENIUS Act effective date, will determine whether third-party yield arrangements like the Coinbase-Circle model survive.
• The CLARITY Act's Section 404, if the Senate passes it, would extend the yield ban to all digital asset service providers, significantly narrowing the channels through which stablecoin holders can earn returns.
• The SEC's treatment of DeFi yield protocols remains undefined. Whether savings rate contracts in protocols like Sky or Aave constitute securities offerings could be tested through enforcement action or further guidance.

The market is already pricing in these outcomes. The yield-bearing stablecoin category is projected to exceed $50 billion in 2026, suggesting that demand for stablecoin yield will persist regardless of the regulatory framework for payment stablecoins. The question is not whether stablecoins will pay interest, but which regulatory wrapper they will use to do so.

For a deeper look at how the yield prohibition debate has evolved and where specific issuers stand, see the stablecoin yield landscape in 2026 and the GENIUS Act regulatory explainer.

This article is for educational purposes only. It does not constitute financial or investment advice. Bitcoin and Layer 2 protocols involve technical and financial risk. Always do your own research and understand the tradeoffs before using any protocol.