Warning: Stablecoin Yields Set to Ignite Regulatory Battle

The regulatory landscape for stablecoins is entering a more complex phase, moving beyond initial debates on issuance to address the intricate challenge of yield-bearing products.

While rules have begun to solidify around stablecoin reserves and redemption mechanisms, a more pressing policy question emerges: how to regulate a payment token that offers its holder a financial return, and which regulatory body is responsible for overseeing such products.

The co-founder and CEO of Trace Finance, Bernardo Brites has a regulated banking correspondent facilitating stablecoin settlement in Brazil, the United States, and emerging markets, argues forcefully for a clear separation.

In his view, yield products must be distinctly unbundled from the payment tokens they are built upon.

He highlights that a token designed for par redemption and backed by liquid reserves presents one set of risks, whereas a product that compensates a holder for retaining that token introduces an entirely different set of financial implications. This distinction, Brites contends, is pivotal in shaping the forthcoming wave of stablecoin regulation.

The nature of a yield feature can vary significantly, potentially falling under the categories of deposit-taking, lending, a securities offering, or a reward program, each with its own regulatory implications.

The specific legal and economic design of the return offered is far more significant than merely the label attached to the token itself when determining the appropriate regulatory oversight.

For the payment token component, a clearer regulatory framework is already taking shape. The US GENIUS Act, for instance, provides a foundational starting point for stablecoin issuers.

It mandates that permitted issuers maintain identifiable reserves at least equivalent to their outstanding payment stablecoins and explicitly prohibits an issuer from paying interest or yield simply for holding the token.

These rules directly address core questions of redemption access and the underlying assets supporting that redemption.

However, the Act leaves certain arrangements less settled. It does not expressly cover scenarios where an affiliate, platform, lender, or other third party offers a return linked to a stablecoin. The White House has identified this as a regulatory gap, allowing firms to potentially offer interest-bearing arrangements outside the direct purview of the issuer.

This creates a challenging distinction, as the economic outcome for a customer might closely resemble issuer-paid yield, even if the legal and structural underpinnings are different, warranting close regulatory scrutiny.

The term 'stablecoin yield' itself masks a variety of operational models. Customers might lend tokens to a platform that then on-lends them, or a platform could invest reserves or customer assets in short-term instruments and share a portion of the returns.

Firms might also offer rewards from their own balance sheets to incentivize payment activity, or customers could use tokens as collateral to receive returns through distinct investment products. Each of these models creates unique claims on assets, different loss paths, and varied duties owed to the customer.

To navigate this complexity, regulators should pose critical questions: Who is guaranteeing the return? Where are the funds located? Who exercises control over these assets? Who bears the losses if a borrower defaults or market conditions shift?

Furthermore, it's crucial to ascertain whether a customer can redeem their payment token at par while the associated yield product remains active or incurs a loss.

The US Securities and Exchange Commission's Division of Corporation Finance, in April 2025, clarified that its stance on certain reserve-backed payment stablecoins does not extend to yield-bearing stablecoins, emphasizing that legal analysis depends on the specific facts of each stablecoin and the circumstances of its offer and sale.

This position underscores the clear boundary: the legal treatment of the payment token does not automatically dictate the legal treatment of the return product built around it.

To ensure robustness, the most effective stablecoin products will visibly delineate these boundaries. A payment stablecoin should have transparent reserve, redemption, and disclosure terms. Concurrently, a yield product should clearly articulate its funding source, counterparty, loss rules, and the precise legal claim a customer receives.

While these two products can operate in conjunction, their functionality should not rely on customer confusion regarding where payment funds end and investment risk commences.

Bank-connected infrastructure is well-suited to support this separation, as authorized financial institutions already possess established mechanisms for account records, customer verification, payment controls, and defined responsibilities for funds.

The true value lies not in a bank logo on a token, but in an operational structure that explicitly identifies which party holds the funds, which party is liable to the customer, and which rules apply in the event of a transaction failure.

Brazil offers a practical example with Banco Central do Brasil’s Resolution BCB 520, which places virtual asset service providers within a defined regulatory perimeter and sets operational rules.

While it doesn't definitively classify every yield product, it illustrates the importance of regulated local settlement and clear responsibility when stablecoins interact with both token networks and national payment systems.

Acknowledging the risk that strict limitations on stablecoin yield might push customers towards offshore platforms or unregulated protocols, the answer is not to conflate all payment tokens and yield products. Instead, regulators can permit products that transparently explain their funding, reserve treatment, redemption rights, fees, and loss allocation.

By setting distinct rules for payment balances, lending accounts, and investment products, regulators can foster innovation in product design while empowering customers to accurately assess the risks they undertake.

Ultimately, stablecoin issuance is evolving into a matter of reserves, licensing, and redemption, while stablecoin yield is becoming a question of control, funding, loss, and disclosure.

Firms that can articulate these aspects in unambiguous terms will establish a stronger foundation for operation as regulatory enforcement and rulemaking continue to advance.