The Stablecoin Yield Prohibition and the Rise of Tokenized Treasury Funds: Regulatory Arbitrage by Legal Form

Suppose two blockchain-based products let investors hold digital dollars, settle transactions on-chain, and maintain highly liquid exposure to US Treasury securities. One is prohibited by law from paying interest. The other may freely distribute Treasury yields. That is now the reality under both the European Union's Markets in Crypto-Assets Regulation (MiCA) and the United States’ GENIUS Act of 2025. Two products, a similar economic function, and opposite legal treatment.

The reasoning behind the stablecoin ban deserves to be taken seriously before it is questioned. Regulators worry that an interest-bearing digital dollar would compete too directly with a bank deposit. If stablecoins could pay yield, households and businesses might shift funds out of the banking system during periods of stress, weakening bank funding and complicating monetary policy transmission. The March 2023 depegging of USDC, triggered by the collapse of Silicon Valley Bank, showed that even fully reserved stablecoins are not immune to contagion. MiCA’s asset-referenced and electronic money token provisions and the GENIUS Act’s interest prohibition both emerged from that concern: keep stablecoins in their lane as a payment instrument rather than a deposit substitute, and blunt the incentive for rapid growth on the back of yield.

The difficulty is that the prohibition did not make the underlying demand for yield disappear; it relocated it. Investors who want a digital dollar that also earns something close to the Treasury bill rate have simply found other products that are legally free to offer it. Tokenized Treasury funds, decentralized finance lending protocols, and offshore stablecoin issuers all sit ready to absorb that demand. A rule designed to protect banks and preserve monetary control has instead pushed capital toward instruments that regulators understand less well and supervise less closely.

Tokenized Treasury funds are the clearest illustration of this dynamic. A tokenized Treasury fund such as BlackRock's BUIDL, Circle’s USYC, or Franklin Templeton's BENJI is, legally, an SEC-registered money market vehicle wrapped in a blockchain token. A payment stablecoin is legally a different animal entirely, governed by MiCA or the GENIUS Act rather than securities law. Yet an investor holding either one is doing much the same thing: parking digital dollars on-chain, settling near-instantly, and seeking exposure to short-term Treasury returns. One instrument may pay for that exposure. The other may not. The line between them is not risk, transparency, or economic substance. It is which statute happens to apply, which is to say, legal form rather than economic function.

Tokenized Treasury funds tracked by RWA.xyz now exceed $15 billion in assets under management, up from $100 million three years earlier. Their yields track short-term Treasury rates closely, currently 3 to 3.5 percent net of fees, like the return that stablecoin holders are barred from receiving. And the Council of Economic Advisers, modelling the GENIUS Act’s yield ban, estimated that the prohibition would increase bank lending by a comparatively modest $2.1 billion while imposing a welfare cost of $800 million on consumers, even under assumptions favorable to the ban. A policy achieving less of its stated banking objective than intended, while pushing digital dollar activity into products organized around legal form rather than economic function.

Nor is the prohibition easy to enforce. The GENIUS Act bars the issuer from paying yield, but it says nothing about exchanges and affiliates that distribute the coin. An exchange can legally distribute rewards that mirror Treasury yields and coordinate promotions with the issuer. This approach adheres to the letter of the law but directly undermines its underlying purpose. The Bank Policy Institute, a leading industry group representing major U.S. banks, has flagged this gap as a significant concern, noting that the largest crypto exchanges already run exactly this play.

None of this means stablecoins and tokenized Treasury funds should be regulated identically, and it is not an argument that the interest prohibition was misconceived. Payments law, securities law, and banking law pursue different objectives, and the underlying concern about deposit substitution is real; reasonable regulators could reach the judgment MiCA and the GENIUS Act have reached. The point is narrower, and more uncomfortable. If the goal is to manage the systemic risk that yield-bearing digital dollars pose, it is difficult to defend a framework in which two products serving that same economic role are treated so differently simply because one is organized as a stablecoin and the other as a fund.

The Financial Stability Board has already flagged the resulting fragmentation as a priority concern, warning that uneven implementation across jurisdictions creates exactly this kind of arbitrage opportunity. The pattern is likely to repeat as new digital dollar products are engineered to sit just outside whichever statute currently restricts yield. Tokenized Treasury funds are unlikely to be the last such product. The underlying incentive, to replicate a restricted instrument’s economics inside an unrestricted legal wrapper, will keep generating new ones, from DeFi lending markets to offshore issuance structures.

The most useful question may not be whether digital dollars should pay interest. It is whether digital asset regulation should continue to depend on legal classification, or whether it should evolve toward a framework that follows economic function instead. That will not be easy. Functional regulation raises its own difficulties, from identifying which entity is responsible for a decentralized protocol to deciding how far banking-style requirements should extend into securities-regulated products. But until regulators engage with it directly, the stablecoin yield prohibition seems likely to keep doing what it has done so far: not eliminating yield on digital dollars, but reorganizing it around legal form rather than economic function.

David Krause is an Emeritus Associate Professor of Finance at Marquette University.