Executive Summary
The GENIUS Act, enacted in July 2025, mandates that stablecoin issuers support their issued stablecoins with reserves on at least a one-to-one basis. These reserves can only include specific assets such as US dollars, federal reserve notes, funds held at certain insured or regulated depository institutions, specified short-term Treasuries, Treasury-backed reverse repurchase agreements, and money market funds. The Act also forbids stablecoin issuers from offering any interest or yield to stablecoin holders, although it does not explicitly ban affiliate or third-party arrangements that might provide interest-bearing products. Some versions of the proposed CLARITY Act aim to close this gap. The reasoning behind prohibiting yield is that competitive returns on stablecoins might lead households to transfer dollars from traditional bank accounts to tokens. Since stablecoin reserves are fully backed rather than fractionally lent, this could potentially decrease bank lending. Some analyses, such as Nigrinis 2025, estimate this impact on lending could reach trillions of dollars. We have developed a straightforward model to assess these claims.
At the baseline calibration of the CEA’s model, eliminating stablecoin yield:
- Results in an increase in bank lending by $2.1 billion and incurs a net welfare cost of $800 million, translating into a 0.02% rise in lending with a cost-benefit ratio of 6.6.
- Sees large banks facilitating 76% of this additional lending, while community banks, with assets below $10 billion, handle the remaining 24%. In this scenario, community banks contribute $500 million in additional lending, marking a 0.026% increase in their lending activities.
Even under every worst-case scenario, the model predicts only $531 billion in additional aggregate lending, representing a 4.4% rise in bank loans by the fourth quarter of 2025. Achieving this would require the stablecoin market to expand to about six times its current size as a share of deposits, for all reserves to be confined to unlendable cash instead of treasuries, and for the Federal Reserve to relinquish its existing monetary framework. Even under these unlikely conditions, community bank lending would increase by only $129 billion, or 6.7%. The likelihood of a positive welfare effect from prohibiting yield is equally implausible. In summary, a prohibition on yield would do little to safeguard bank lending while sacrificing the consumer benefits of competitive returns on stablecoin holdings.
