On one hand, it seems fair to allow stablecoin holders to share in any yield that is generated by the backing assets of a fully-funded stablecoin.

On the other hand, if financial entities, all delivering a rather simple commodity type product such as a stablecoin, start competing on yield, then the asset side of the business will invariably start taking on further and further risk in the pursuit of delivering market-leading yields. It is like an inescapable gravitational pull on the business.

One can try to regulate the risk taken on in generating yield in the underlying assets, but one would expect the business will uncover any and all holes that might allow risk-taking advantages and generate yield.

Yield competition will also over time erode any movement towards a re-architecting of the financial system, with stablecoins as a basestone, as yield-hungry stablecoin “bad apples” will emerge and damage the foundational trust that is required in the all-weather stability of the stablecoin.

In any new architecture of the financial system, transparency should be one of the key virtues. This means consumers should have access to instruments and tokens that deliver yield, but also be transparently made aware of the risks that are taken to deliver such yield. Taking on risk should be an active choice. By extension, stablecoins should clearly signify that this is a product that is purely in the business of minimising the risk of any kind of loss — not in the business of delivering best yields. Only with this principle at its core should regulators allow stablecoin licensing.

This principle “rhymes” with the concepts of narrow banking and the concept of keeping the risk-taking franchise away from the risk-minimisation utility franchise.

So, on balance, no yield on stablecoins.

Originally published on Medium, April 2025.