Banks Route Stablecoin Balances into DeFi to Evade GENIUS Act Restrictions
The GENIUS Act restricts issuers from directly paying yield to stablecoin holders.
Banks exploring stablecoin issuance are looking at yield-generating strategies for the reserves or balances themselves, routing those balances into DeFi protocols shifts smart-contract and liquidity risk onto whoever is exposed to the underlying yield strategy.
The law draws a specific line: issuers cannot pay interest or yield directly to holders just for holding the token. This restriction aims to keep stablecoins from functioning as unregulated bank deposits that compete with insured accounts, but it does not settle what happens once a bank routes the reserves into a yield-generating strategy.
A separate DeFi protocol built on top of a bank-issued stablecoin offering a lending or liquidity product can be structurally different, even though the practical experience for an end user chasing yield might look nearly identical. This is where the risk transfer actually happens, and it is the part of the story that gets lost when yield percentages get the headline instead.