Stablecoins Face Growth Cap Under GENIUS Act, Economist Issues Warning

Key Insights:

• Stablecoins cannot compete with interest-bearing bank accounts under the GENIUS Act’s prohibition on yield payments, according to Berenberg economist Atakan Bakiskan.
• Migration from bank deposits to Treasury-backed stablecoins could reduce banks’ capacity to lend or purchase government debt, raising systemic concerns.
• Tokenized deposits and money-market funds emerged as yield-bearing alternatives that operate outside the GENIUS Act’s interest ban restrictions.

Berenberg economist Atakan Bakiskan argued that stablecoins face structural limitations that prevent significant growth, despite new federal regulations designed to legitimize the sector.

Bakiskan stated that stablecoins were unlikely to absorb substantial US government debt or compete effectively with bank deposits. The economist pointed to the GENIUS Act’s prohibition on interest payments as the primary constraint.

The GENIUS Act bars payment stablecoin issuers from offering any form of interest or yield to holders, preventing these digital assets from matching returns available through traditional bank accounts.

Bakiskan explained that, because the GENIUS Act bars issuers from paying interest, stablecoins can’t match the returns of interest-bearing bank accounts, reducing their appeal.

The economist added that if deposits migrated into stablecoins backed by Treasury securities, banks could face reduced capacity to lend or purchase government debt.

The GENIUS Act, signed into law on July 18, established the first federal regulatory framework for payment stablecoins.

The legislation requires permitted payment stablecoin issuers to maintain reserves backing outstanding coins on a one-to-one basis, consisting solely of specified assets, including US dollars and short-term Treasuries.

Regulatory Intent Behind Interest Ban

The interest prohibition reflected deliberate regulatory design aimed at preventing stablecoins from functioning as high-yield deposit substitutes.

Regulators explicitly recognized that payment products differed from banking products, leading to the ban on yield or interest offerings.

Banking groups warned that large-scale deposit flight into stablecoins could raise funding costs and shrink balance sheets available for loans and Treasury purchases.

At the current scale, stablecoins remained small relative to US bank deposits and the Treasury market, but the channel Bakiskan described maintained conceptual validity.

The GENIUS Act’s restrictions created a structural handicap for stablecoins competing for long-term store-of-value demand from households and corporations.

The coins could still expand as payment and trading infrastructure, but zero yield presented a ceiling for mass cash parking.

However, Bakiskan’s analysis appeared incomplete when it came to tokenized deposits and similar products that circumvented the interest ban.

The GENIUS Act explicitly carved out tokenized deposits as a separate category: digital representations of bank deposits that could pay interest and remain fully within the banking system.

Banks and policymakers increasingly treated tokenized deposits, rather than GENIUS-compliant payment stablecoins, as the primary vehicle for on-chain yield.

These products allowed financial institutions to offer blockchain-based dollar instruments while maintaining the ability to pay returns.

Major banking associations, led by the American Bankers Association, urged lawmakers to extend the interest ban to affiliates and exchanges, warning that unchecked yield programs could destabilize the banking system by draining deposits used for lending.

Market Implications for Stablecoins

Bakiskan’s assessment proved directionally accurate for GENIUS-compliant payment stablecoins specifically.

The law deliberately blocked these instruments from competing as deposit replacements or primary vehicles for absorbing government debt.

However, the analysis understated the broader competitive threat from on-chain dollars.

Yield-bearing tokenized deposits and tokenized money-market funds represented more significant challenges to traditional bank deposits than non-interest payment stablecoins restricted by the Act.

Banks and crypto firms maintained divergent positions on implementation. Coinbase argued the interest ban should apply only to issuers, while major banks pushed Treasury to extend restrictions more broadly.

The regulatory framework created multiple categories of dollar-denominated digital assets with varying capabilities.

GENIUS-compliant stablecoins gained regulatory clarity and payment utility but sacrificed yield. Tokenized deposits retained interest-bearing features while operating under existing banking rules.

Financial institutions evaluated whether to launch their own stablecoins, partner with established issuers, or focus on tokenized deposit products.

The competitive landscape reflected fundamental tension between payment efficiency and yield generation in digital dollar instruments.

Although stablecoins are treated as payment rails with regulatory certainty and a zero-yield requirement, issuers are already seeking alternatives to circumvent this. As a result, it is too early to state that regulation is a hindrance to tokenized dollars.