Stablecoin with Built-in Interest

Do you remember when current account balances used to earn interest?

The mechanism was simple: when the bank lent you money, it charged you an interest rate in return; when you were the one lending money to the bank, it paid you interest, credited quarterly to your current account.

Indeed, the difference between interest received and interest paid, known as the intermediation margin, is the main source of income a bank earns from its business, and so far, everything checks out.

Then, in the years following the great financial crisis, rates fell so much that interest on current accounts gradually dropped to zero, and in some cases even turned negative.

When the trend reversed and rates began rising again, banks were generally not as proactive in restoring interest on current accounts. Most chose not to reinstate automatic interest at a set rate, but instead required customers to take some commercial action, accept a time constraint, or move funds into a separate account in order to benefit from any return on their money.

According to the latest Bank of Italy report, remuneration has remained very low: current account deposits yield an average of 0.28%, with 0.17% for households and 0.56% for non-financial companies.

The curious thing is that, just as interest on current accounts has become an exception you have to go looking for in the traditional banking system, in the digital asset space it is gradually becoming the rule. But let's take a step back: to understand how we got here, we need to return to the beginning of the stablecoin story.

Tether was born in 2014, when the crypto sector was still small, chaotic, and almost entirely outside the traditional regulatory perimeter. Blockchain allowed instant, extremely low-cost transfers of value, but cryptocurrencies fluctuated too much in value to be used as a means of payment. The idea was simple and extremely powerful: take the stability of the dollar and combine it with the transferability of Bitcoin.

The first use case, however, wasn't paying for coffee. It was much more practical: moving liquidity between exchanges.

Anyone operating across multiple crypto platforms faced the obvious problem that entering and exiting the banking system was slow, expensive, and often unreliable. International wire transfers between platforms took days, exchanges had fragile banking relationships, and money transfers were often blocked by procedures and red tape. The tokenized dollar solved the problem: instead of sending bank dollars, you sent a token that represented dollars. Within minutes, liquidity could move from one platform to another and be used to buy bitcoin, sell ether, close an arbitrage trade, or simply park value without exposure to market volatility.

Tether did not succeed because someone authorized it from above. It succeeded because it solved a real problem from the ground up.

Then the use case expanded.

Outside the United States and Europe, for millions of people the problem wasn't arbitraging between exchanges. It was gaining access to the dollar. In countries with high inflation, unstable local currencies, capital controls, or inefficient banking systems, a dollar-denominated stablecoin became a form of informal current account: not government-guaranteed, not risk-free, but accessible from a smartphone, transferable within minutes, usable for international payments, and increasingly simpler to obtain than a foreign-currency bank account.

For years, many observers, myself included, thought that the United States would sooner or later ban, or heavily restrict, a private dollar issued offshore. It was a reasonable hypothesis: Tether kept growing larger and more opaque, and it hadn't originated within the US banking system. Instead, something more interesting happened: the United States realized that dollar stablecoins, if properly channeled, could become a tool for projecting monetary power.

A dollar stablecoin exports demand for dollars. And if its reserves are invested in US Treasury securities, it also exports demand for US public debt. Tether has become one of the largest private holders of Treasuries in the world, surpassing Germany.

What initially seemed like a foreign body within the American financial system has become an extension of that very system, and today it has a combined market capitalization of roughly $300 billion, now backed by legislation (the GENIUS Act) that enables and legitimizes it.

This brings us to today's topic: yield-bearing stablecoins (YBS), digital coins with built-in interest.

The traditional stablecoin, like USDT or USDC, works much like a non-interest-bearing current account. You hold a digital dollar, the issuer invests the reserves in liquid, safe instruments, and the yield stays entirely with the issuer. Today Tether, the leading operator, has issued nearly $200 billion in digital dollars, and it keeps the coupons on the nearly $200 billion in Treasury securities it holds as collateral. With rates at 4-5%, it's easy to see why this generates very high revenues for the company.

YBS were born less stingy, choosing to share profits with users; the user no longer just holds a stable token: they hold a token that automatically receives a share of the yield generated as well.

Once a user has experienced a stablecoin that is liquid, transferable, usable in DeFi, and capable of accruing yield automatically, going back to a non-interest-bearing stablecoin feels less natural. And going back to a current account that pays zero becomes even harder to justify.

This is exactly why banks view the phenomenon with concern.

A stablecoin that pays no interest is already competition in payments, international transfers, and digital custody of value. A stablecoin that also pays yield becomes direct competition for deposits. If savers can hold liquid, interest-bearing digital dollars, why would they leave idle liquidity with a traditional intermediary? Banks' answer is that deposits fund credit to the real economy, that excessive outflows could reduce institutions' ability to issue loans, and that instruments perceived as money-equivalent but lacking the same public guarantees could create systemic risks.

These are arguments that shouldn't be dismissed. Yield-bearing stablecoins are not current accounts. They are not covered by deposit guarantee schemes. They expose holders to smart contract risk, governance risk, liquidity risk, depeg risk, counterparty risk, and regulatory risk. Yield is never free: it is always compensation for a risk, even when that risk is hard to see.

This is why US stablecoin regulation has chosen to distinguish between non-interest-bearing stablecoins and yield-paying instruments. The underlying idea is that if a digital currency wants to be used as a means of payment, it shouldn't also turn into an interest-bearing deposit outside the banking system.

The problem is that DeFi tends to recombine what regulation tries to separate. As the saying goes in Italy, "no sooner is the law made than the loophole is found." A stablecoin may not pay interest at the issuer level, but it can be deposited into a vault, converted into a receipt token, lent out in a money market, allocated to a protocol that buys tokenized Treasuries, or built into a product that distributes yield. The line between money, deposit, money market fund, and credit token becomes increasingly thin.

This is where yield-bearing stablecoins become a laboratory for the future of money.

In today's system, yield was a product separate from liquidity. You had a current account for payments and a fixed-term deposit, money market fund, or savings account to earn a rate. In the new system, liquidity and yield tend to merge into the same digital object. Money is no longer just an available balance: it is a programmable, transferable, composable balance that earns a return in real time.

Of course, we don't yet know which model will win out. It's possible that many yield-bearing stablecoins will be brought under rules similar to those governing money market funds. It's possible that some will be banned for retail users in certain jurisdictions. It's possible that banks themselves will start issuing interest-bearing stablecoins, turning a threat into a new deposit-gathering product.

But one thing seems clear: after years of getting used to interest-free current accounts, the idea that liquidity can once again earn a return automatically is making its way back in through technology's side door.

Not through a branch.

Not through a savings account.

Not through a twelve-month lock-in.

Through a digital currency that simply grows while you hold it in your hand.

You look at your balance on your smartphone, and you watch it increase in real time, second by second.