How Onchain Interest Could Transform the Crypto Market
Stablecoins have long been seen as a bridge between traditional finance and the rapidly evolving crypto landscape. Now, Coinbase CEO Brian Armstrong is advocating for legislative reforms that could dramatically change the way stablecoins function by allowing issuers to pay "onchain interest" to holders. If successful, this move could reshape the financial ecosystem, strengthen the US dollar’s global dominance, and trigger major shifts in the cryptocurrency market. However, regulatory hurdles remain, and the outcome of ongoing legislative debates will have far-reaching consequences.
Armstrong’s Call for Change
In a post on X (formerly Twitter) on March 31, Armstrong urged policymakers to create a legal framework that enables stablecoin issuers to offer interest payments directly to consumers. His argument is simple: if banks can pay interest on deposits, why can’t stablecoin issuers do the same? He contends that applying similar rules to crypto firms would promote fairness, enhance competition, and align with free-market principles.
According to Armstrong, the ability to earn yield on stablecoins would not only benefit consumers by providing higher returns than traditional savings accounts but would also strengthen the US economy. He suggests that the US has a unique opportunity to leverage stablecoins for economic growth, encouraging the global adoption of US-dollar-backed digital assets.
The Current Legislative Landscape
At present, two competing bills—the Stablecoin Transparency and Accountability for a Better Ledger Economy (STABLE) Act and the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act—are making their way through Congress. Neither of these bills currently includes provisions for on-chain interest.
In fact, the STABLE Act explicitly prohibits stablecoin issuers from paying interest to holders. Similarly, the GENIUS Act, which recently advanced through the Senate Banking Committee, was amended to exclude interest-bearing stablecoins from its definition of a "payment stablecoin."
Despite this, Armstrong remains optimistic that lawmakers can "level the playing field" and create a regulatory structure that allows stablecoin issuers to distribute interest payments, similar to banks offering yield on savings accounts.
Potential Impact on the Crypto Market
1. A More Competitive Alternative to Traditional Banking
One of the biggest potential impacts of on-chain interest would be its ability to rival traditional savings accounts. Armstrong pointed out that the average US savings account currently offers an interest rate of just 0.41%, while stablecoin holders could earn around 4% under the proposed changes.
If stablecoins could legally offer such high yields, this would incentivize a shift of capital away from traditional banks into the crypto ecosystem. More individuals and businesses would hold stablecoins, increasing their market capitalization and liquidity. This could put pressure on traditional banks to increase interest rates to remain competitive, creating a ripple effect across the financial sector.
2. Strengthening the US Dollar’s Dominance in Crypto
A key argument in favor of allowing on-chain interest is that it could reinforce the dominance of the US dollar in the global economy. Currently, dollar-backed stablecoins like USDC (issued by Circle and supported by Coinbase) and USDT (Tether) are already widely used for cross-border transactions, decentralized finance (DeFi), and remittances.
If on-chain interest were permitted, the demand for US-dollar stablecoins could increase dramatically, drawing even more liquidity into US-based financial instruments such as Treasury bonds. Armstrong argues that this would "pull dollars back to US treasuries" while ensuring that US-backed stablecoins remain the dominant choice in a digital financial system.
3. Expansion of DeFi and Yield-Bearing Products
DeFi (decentralized finance) is one of the most innovative sectors in crypto, and enabling on-chain interest could fuel its rapid expansion. Yield-bearing stablecoins could integrate seamlessly with lending protocols, automated market makers (AMMs), and decentralized exchanges (DEXs), unlocking new financial instruments and investment strategies.
Additionally, institutional investors and hedge funds that have been hesitant to enter the crypto space due to regulatory uncertainty may be more inclined to adopt stablecoin-based financial products once clear laws allow interest payments. This could further legitimize DeFi and increase its mainstream adoption.
4. Increased Regulatory Scrutiny and Potential Risks
While Armstrong’s proposal could create exciting opportunities, it also comes with significant risks. One major concern among regulators is that high-yield stablecoins could attract excessive speculative activity, leading to risks similar to those seen in past financial crises.
If consumers begin treating stablecoins as a "risk-free" investment rather than a transactional tool, a sudden loss of confidence in a major issuer could destabilize the entire crypto market. For example, if an issuer fails to maintain adequate reserves, a bank-run scenario could unfold, potentially leading to liquidity crises across DeFi platforms and centralized exchanges.
To address these risks, any legislation allowing on-chain interest would likely require strict reserve requirements, transparency mandates, and consumer protections to prevent abuse and market manipulation.
5. Implications for Bitcoin and Altcoins
A surge in stablecoin adoption due to on-chain interest could also have unintended consequences for Bitcoin and other cryptocurrencies.
Reduced Volatility Appeal: Many investors use stablecoins as a way to "park" funds between trades, avoiding the volatility of Bitcoin, Ethereum, and altcoins. If stablecoins become interest-bearing, investors may prefer to hold them long-term rather than reallocating funds into more volatile assets.
Shift in Capital Flow: Crypto traders who typically move funds between Bitcoin, Ethereum, and stablecoins could see less incentive to return to riskier assets if they can earn yield on stablecoin holdings instead. This could slow the speculative trading cycles that have historically driven crypto bull runs.
Impact on Staking and Yield Farming: If stablecoins offer competitive yields, they could draw liquidity away from existing staking and yield farming platforms. Projects relying on token incentives may need to increase their rewards to compete with interest-bearing stablecoins, potentially impacting tokenomics and governance models.
What Comes Next?
The push for stablecoin reform is part of a broader conversation about the role of crypto in the financial system. With increasing political and regulatory interest in stablecoins, lawmakers will need to decide whether they want to embrace the innovation or impose stricter controls.
While Armstrong’s proposal offers compelling economic benefits, it remains unclear whether legislators will modify existing bills to accommodate interest-bearing stablecoins. Given the bipartisan support for stablecoin regulation in Congress, there is hope for a compromise that allows some form of yield while maintaining regulatory safeguards.
Conclusion: A Game-Changer for Crypto or a Regulatory Nightmare?
The prospect of on-chain interest on stablecoins represents a major crossroads for the crypto industry. If regulators approve it, stablecoins could evolve into a true alternative to traditional banking, accelerating DeFi adoption and reinforcing the US dollar’s dominance in the digital economy. However, without proper oversight, the introduction of yield-bearing stablecoins could pose systemic risks, leading to market instability and increased scrutiny from regulators.
As lawmakers debate the future of stablecoins, the crypto market will be watching closely. The outcome of these discussions will shape not only the next phase of stablecoin development but also the broader landscape of digital finance. For now, investors and crypto enthusiasts should stay informed and be prepared for the regulatory shifts that could redefine stablecoins in the years to come.