The Genius Act offers clear benefits, such as expanding global access to the US dollar through Stablecoins, but some of its limitations paradoxically create new paths for growth in other areas of the crypto industry. Specifically, the law prohibits Stablecoin issuers from paying interest to Stablecoin holders.
This limitation raises the problem of institutions and sophisticated investors constantly seeking yield opportunities. Luckily for them, distributed finance (DEFI) offers a huge array of mechanisms that can generate returns. As the act of genius begins to take off, it may also solidify Defi’s role in the market.
Does the Genius Act redirect capital to Defi?
The genius act officially signed into law has already seen a surge in the Stablecoin market around the world.
The US is set to surge in adoption as it supports the use of these digital assets with a comprehensive framework that provides ample consumer protection and financial stability.
Interestingly, legal restrictions, particularly the ban on stubcoins with harvests, could stimulate activity in other parts of the crypto sector. The issuer holds interest reserves like the Treasury bill to back up the stubcoin, but this interest cannot be passed on to the holder.
This provision creates significant challenges for institutions and sophisticated investors. A sophisticated investor is often obligated to seek the benefits of capital through the obligations of the fiduciary.
Because regulated stubcoins cannot provide passive income, these substantial pools of institutional funds could be directed towards alternatives to generate returns.
With this scenario, decentralized finance becomes a viable solution for those looking for opportunities to support their yields.
Rerouting yield search
For some of the biggest stubcoin issuers in today’s market, the prohibition on paying interest to holders of the Genius Act will not affect them.
“The biggest stubcoin as a USDT and USDC has never provided a direct yield to its holders, so there is no significant change from this from the act of genius,” Julio Moreno, head of research at Cryptoquant, told Beincrypto.
However, this legislation will have an impact as new entrants protect current services. Such dynamics indirectly encourage investors to seek yields elsewhere.
“This allows investor capital to be redirected towards a decentralized platform that offers a more transparent and potentially highly opportunities to return to a more transparent, potentially highly advanced way, such as lending protocols, liquidity pools, and tokenized real-world assets. As a result, defi could become a preferred destination for yield capital, especially in conjunction with clearer regulatory guidance.
The market is already reflecting this shift. Investors are increasingly drawn to Defi versions of Stablecoins, such as Aave’s AUSDT and Ethena’s Susde. These allow for stakes or lending to produce yields within a decentralized protocol.
Like BlackRock and Franklin Templeton launched, tokenized money market funds (MMFs) also appear as important means of Stablecoin yield.
Moreno highlighted that these stained stub coins and tokenized MMFS have grown significantly to reach a market capitalization of over $10 billion.
Instead of eliminating the demand for yields on a stable asset, the genius law simply redirects it from a stable product to another product. However, this redirection has brought certain, increasingly important types of yields to the spotlight of players at the facility.
The appeal of Defi for institutional investors
As institutional investors increasingly seek a return path in the post-Genius ACT world, Defi Platform offers attractive features tailored to your needs.
“The DEFI platform provides institutional investors with programmable yields, global liquidity and access to innovative financial products, all supported by transparent smart contracts,” Periker said, “The act of genius laying the foundation for regulatory clarity makes institutions more and more fascinating, subject to DEFI’s residency potential.”
This appeal is particularly directed at what Periser calls “real yield” opportunities.
“These generate revenue streams from actual economic activity rather than token incentives,” he explained.
The most important areas these revenue streams generate include transaction fees derived from activities in decentralized exchanges and interest obtained from excessive lending platforms. Defi Primitives has also appeared as another option, offering unconventional yield structures like on-chain insurance.
“These models provide more sustainable returns and a clearer risk profile and better coordinate with the institutional risk framework,” Pellicer added.
However, not all experts agree to the direct impact of the new law on existing Defi platforms.
Does traditional finance compete with defi?
Centrifugal advisor Eli Cohen suggested that this does not mean that stubcoin holders cannot obtain returns, even though the act of genius prevents stubcoin issuers from paying interest.
“Only Stablecoin issuers will block you from offering yields, but now others, including banks and broker-dealers, can do so. The genius law expands Stablecoins opportunities and does not limit them,” Cohen told Beincrypto.
He also expressed skepticism that existing, unauthorized defi platforms will become the main destination for capital for facilities seeking yields. Instead, new products may pop up.
“I think the Tradfi agency will create a mirror-controlled platform and compete with Defi Lending Protocols like Aave and gain market share,” he added.
However, the indirect benefits of genius law provide the most important advantages for Defi and the broader crypto industry.
Banking as a lamp: A new era of adoption
Defi’s adoption at the Genius Post-Genius Act Era thrives, but not because of investors seeking yield opportunities. Instead, the potential for a significant influx of new users will drive its proliferation.
“This happens because US retail banks like JPM Chase and Citi have incentives to issue stubcoins and use them for depositors. The number of US retail bank account owners is huge, and it’s very important to bring only a portion of this market into the crypto space,” Cohen explained.
Beyond new users, Cohen has identified key political interests. When strong US financial institutions actively participate in the crypto market as Stablecoin issuers, they are granted to promote and expand these markets.
“This makes it very difficult for future US managers to return to the open hostility of the Biden/Gensler era,” he added.
Under these circumstances, the future of Defi and Crypto generally appears to be bright.
Growth certainty
Despite these different views on the precise mechanisms of growth, experts have a clear consensus that genius acts produce important expansions of crypto ecosystems.
With the involvement of larger facilities with “real yield” opportunities, the emergence of new bridges between traditional finances and debt, or the significant influx of new users via bank-issued stubcoins, Defi’s future appears to be poised for substantial and perhaps unexpected expansion.
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