Many within the crypto industry heralded the passing of the GENIUS Act and its signature into law by the President. This is the bill that establishes the regulatory framework for stablecoins. What was once the Wild West, wrought with uncertainty, now has clarity.
That is not to say, however, that is all rosy. Some question the passing of the bill without the banning of Central Bank Digital Currencies. A separate bill did pass the house but lacks the votes in the Senate.
One part of the bill that stands out is the ban on yield-bearing stablecoins. Few have discussed the impact of this upon the entire market.
That is what we will do in this article.
The GENIUS Act Might Have Kicked Off A DeFi Boom
Legal stablecoins, according to the new law, are to back 1:1 backed. Asset backed stablecoins are the only ones approved. Each token has to have $1 in highly liquid assets behind it. In the US, this means mostly T-bill or repo contracts.
Obviously, these provide a return. That is why entities (and individuals) invest in such vehicles. They put up money expecting to receive more back.
For stablecoin issuers, this is a benefit. Having millions of stablecoins means generating a steady stream of revenues from the backing assets.
What the GENIUS Act did was ban the paying of a return to the holders of the stablecoins. The issuer must receive the revenue and cannot pass it on. Hence, the stablecoins are not interest bearing.
This is a boom to the issuers. That said, it does present a problem.
Many search for yield. Leading the charge here are institutions. These entities have a fiduciary responsible to generate a return on the capital of the organization.
The point is these companies have to hold something more than just stablecoins. Since the interest is going to the issuer and not the holders, other options have to be sought.
Of course, we have to mention the fact institutions control most of the money with enormous sums in assets under management.
The Rise of DeFi
There are a few people speculating that the GENIUS Act is going to spur a DeFi Summer. The idea is that DeFi usage will skyrocket.
What we could be looking at is the expansion of DeFi applications, offering the return that is desired by the financial public, especially institutions.
One approach is generating passive income on-chain. This could mean staking or associated services along these lines. At present, Ethereum is getting a lot of attention in this regard. Those entities investing in Ethereum can provide network security by staking the token, thus generating a return as more ETH is paid out.
Are we looking at an increase in Total Value Locked (TVL)? Might this be on the verge of skyrocketing?
To understand the potential outcome, watching institutions is the path. Knowing they have to seek yield means their entry in crypto will focus upon this.
Here is where we have a major disconnect.
Crypto, thus far, is nothing more than a casino. We see green candle people seeking "price go up". They are speculators, looking to buy and sell at a higher price.
Certainly this is a legitimate pathway. Those who got in a decade ago by purchasing Bitcoin certain saw fruits with this approach. There is a likely change those getting a hold of BTC will see the same outcome in the future.
Our disconnect comes from the fact that the money players do not take this approach. Institutions are after yield more than speculation. The fact that they are blocked by law from getting it via stablecoins means other options are required.
Suddenly, the premise of DeFi makes a lot more sense. We also can see the enormous potential this might offer.
There is a reason the bond market is bigger than equities. Major institutions are always seeking yield while looking to reduce risk. Insurance companies, as an example, are not entering financial markets to speculate. They have a very targeted plan to maximize the capital resources the companies hold.
To succeed, crypto is going to have to offer the same benefits. It is where the big money will head.
In the United States, it will not move into stablescoins. Instead, those will have to be used in a way to generate a return.
Hence, DeFi might explode over the next couple years.