Stablecoin yield bans could push capital offshore into ‘unregulated instruments’

Regulators globally are increasingly targeting stablecoin yield-generating activities, viewing them through the lens of traditional banking laws and heightened investor protection concerns following major crypto market collapses. While the intent is to safeguard consumers from unsustainable returns and fractional reserve risks, industry experts warn that outright bans or overly restrictive regulation on these products within established jurisdictions could severely backfire.

Stablecoin yield platforms, which often utilize lending mechanisms or staking protocols to offer annual percentage yields (APYs) ranging typically from 3% to 8%, form a crucial component of crypto market liquidity and utility. As regulatory bodies in major economies, such as the United States and the European Union, tighten enforcement and consider prohibiting platforms from offering such yields, the immediate consequence is not the cessation of demand, but the geographical displacement of supply.

This regulatory pressure is predicted to instigate significant capital flight. Institutional and retail investors who rely on stablecoin yield for competitive returns will inevitably transfer assets to offshore, unregulated, or minimally regulated venues. These alternative instruments typically include decentralized finance (DeFi) protocols operating outside the reach of established legal frameworks or centralized exchanges registered in jurisdictions with lax oversight.

The critical danger is that moving capital offshore transfers risk away from regulated visibility and investor recourse. Unregulated instruments often lack standardized auditing, robust collateralization requirements, and transparent segregation of customer funds, exposing investors to significantly higher counterparty risk and susceptibility to fraud. Paradoxically, the drive to create a ‘safer’ domestic crypto environment by banning yield could instead channel sophisticated and unsophisticated capital directly into the riskiest corners of the global crypto ecosystem, undermining the fundamental goal of investor protection.

Policymakers are therefore advised to pursue a risk-mitigation strategy focused on transparency, auditing, and robust disclosure requirements for yield products, rather than outright prohibition, to ensure capital remains within regulated systems where oversight and legal protection can be effectively applied.

Source: Stablecoin yield bans could push capital offshore into ‘unregulated instruments’