DeFi Embraces Tokenized Money Funds in Response to Stablecoin Yield Restrictions

Core Insights - The U.S. GENIUS Act has prohibited interest-bearing stablecoins, creating a legal gray area for these products in the U.S. market [1][4] - New decentralized finance (DeFi) products are emerging that leverage tokenized money market funds (MMFs) to generate on-chain yields [2][7] Group 1: Regulatory Impact - The GENIUS Act has entrenched the prohibition of yield-bearing stablecoins, which is perceived as a concession to traditional financial institutions [4] - Banks are concerned about potential deposit flight and are lobbying to close loopholes that allow platforms to pay interest on stablecoin balances [4] Group 2: Alternatives to Stablecoins - Tokenized MMFs are being developed as an alternative to yield-bearing stablecoins, allowing for the generation of on-chain Treasury yields [7] - Unlike stablecoins, which maintain a dollar peg without accruing interest, tokenized MMFs can accrue interest over time by holding U.S. Treasuries or other government bonds [3] Group 3: Market Dynamics - Major stablecoin issuers like Tether and Circle offer limited savings opportunities, leading to the development of various yield-bearing alternatives that distribute reserve income to holders [5][6] - Examples of these alternatives include Mountain's USDM, Ondo's USDY, and Lift's USDL, although they are not available in the U.S. market [6] Group 4: Utility of Tokenized MMFs - Tokenized MMFs, such as Franklin Templeton's OnChain U.S. Government Money Fund, provide an attractive alternative for generating yields despite lacking the payment functionality of stablecoins [8]