DeFi Embraces Tokenized Money Funds in Response to Stablecoin Yield Restrictions

Key Takeaways

• The U.S. GENIUS Act prohibits interest-bearing stablecoins.

• Tokenized money market funds present an alternative way to generate on-chain Treasury yield.

• New DeFi products combine elements of both.

With the passage of the GENIUS Act, yield-bearing stablecoins were expelled from the sphere of regulated crypto products, at the very least landing in a legal gray area for U.S. users. 

But investors have other ways to generate on-chain yields rooted in real-world assets. For example, recent product launches build decentralized finance (DeFi) utility on top of tokenized money market funds (MMFs).

At one level, fiat-collateralized stablecoins and tokenized MMFs are very similar. 

Both draw their value from U.S. Treasuries or other government bonds held by designated custodians. But by moving that value on-chain, assets move faster, without the hassle of clearing securities. 

The main difference is that while MMFs accrue interest over time, the most popular stablecoins simply maintain their peg to the dollar—no dividends or returns. 

In the U.S., that standard is now entrenched in law thanks to the GENIUS Act, which prohibits interest-bearing stablecoins. 

The restriction is seen as a concession to Wall Street. Even with the ban in place, banks are worried enough about a potential deposit flight that they are actively lobbying to close a loophole that platforms use to pay interest on stablecoin balances.

From the beginning of the stablecoin movement, the most popular assets have functioned as pure payment instruments. 

Tether retains 100% of the profit it makes from USDT reserves, which it has used to build a global technology empire that could soon be valued at half a trillion dollars.

Meanwhile, Circle pays USDC holders a portion of its reserve income via a revenue-sharing deal with Coinbase. But the feature only applies to Coinbase Wallet balances.

With the big two stablecoin issuers offering little in the way of savings opportunities, various yield-bearing alternatives have been developed over the years.

Mountain’s USDM, Ondo’s USDY, Lift’s USDL, and others automatically distribute reserve income to stablecoin holders via an on-chain rebasing mechanism. But the issuers of these tokens insist they aren’t available in the U.S. market.

With yield-bearing stablecoins outlawed in the U.S., tokenized MMFs present an attractive alternative. Sure, they don’t have stablecoins’ payment functionality, but that doesn’t mean they don’t have utility. 

Consider Franklin Templeton’s OnChain U.S. Government Money Fund (FOBXX).