The U.S. GENIUS Act, signed into law on July 18, 2025, by President Trump, is facing scrutiny for its ban on yield-bearing stablecoins, a move that some believe favors traditional financial institutions (TradFi) over the digital asset industry. The legislation, which aims to stabilize the market and mitigate risks associated with crypto assets, is now being criticized for potentially stifling innovation in the rapidly evolving landscape of tokenization.

The GENIUS Act prohibits stablecoin issuers from offering interest to both retail and institutional investors, a feature that has historically made stablecoins an attractive alternative to traditional financial instruments. This restriction has raised concerns among industry leaders, with some arguing that it undermines one of the key advantages of stablecoins: the ability to generate yield. Temujin Louie, CEO of Wanchain, suggests that this provision effectively shields the competitive edge of money market funds (MMFs), which have long provided interest on cash balances.

Tokenized MMFs are increasingly being viewed as a viable alternative to stablecoins, particularly given their potential for programmability, faster transactions, and broader use cases, such as margin collateral. JPMorgan strategist Teresa Ho noted that tokenized MMFs could replicate the speed and flexibility of stablecoins while maintaining regulatory oversight and safety. EY's Paul Brody echoed this sentiment, stating that tokenized MMFs may find a new niche on-chain, especially now that stablecoins are unable to offer returns.

However, stablecoins still possess unique advantages, particularly within the decentralized finance (DeFi) ecosystem. Unlike tokenized MMFs, stablecoins can function as bearer assets, allowing for seamless integration into DeFi protocols. According to EY's Brody, the permissionless nature of stablecoins allows them to be easily integrated into DeFi services and other on-chain financial services without complicated management of access and transfer controls. He suggests that if tokenized money market funds have many restrictions that prevent such usage, the attraction of yield might not be enough to offset the added operational complications.

The GENIUS Act's prohibition on yield-bearing stablecoins has led to speculation that banking industry lobbying may have influenced the policy debate around stablecoins. There are concerns that banks feared their competitiveness would be threatened if stablecoin issuers were allowed to offer yield directly to holders.

Despite the ban on yield, the GENIUS Act is largely viewed as a positive step forward for stablecoin adoption in the United States. The Act establishes a regulatory framework for payment stablecoins, defining them as digital assets designed to be used as a means of payment or settlement, and issued by an issuer obligated to convert, redeem, or repurchase such coins for a fixed amount of monetary value. It aims to bring order to the U.S. stablecoin market by imposing strict rules on reserves, financial disclosures, and sanctions compliance. Permitted payment stablecoin issuers (PPSIs) must maintain reserves backing outstanding payment stablecoins on at least a one-to-one basis, consisting only of specified assets, including U.S. dollars and short-term Treasuries. The Act also includes measures to bolster consumer protection, requiring all stablecoin issuers to comply with the Bank Secrecy Act, ensuring measures are in place to protect against money laundering and the financing of terrorism.

However, the GENIUS Act also has potential drawbacks. Some experts have pointed out a "Tether loophole," arguing that the law does not adequately regulate offshore stablecoin issuers. This could put U.S. issuers at a competitive disadvantage and potentially encourage new issuers to incorporate in less-demanding jurisdictions offshore.

Despite concerns, the GENIUS Act represents a significant step toward integrating stablecoins into the mainstream financial system. As TradFi institutions continue to explore tokenization and the use of blockchain technology, the regulatory landscape for digital assets is likely to continue evolving.