Reconstructing Liquidity Structures of Yield-Generating Stablecoins: Regulatory and Capital Flows Behind the Growth of USDY and sUSDS

The stablecoin market is experiencing its most profound structural split since inception.

In the first quarter of 2026, the total market capitalization of the entire stablecoin industry surpassed $320 billion, climbing further to a record high of approximately $323 billion in mid-May. Quarterly trading volume reached $8.3 trillion. But what’s truly worth noting isn’t just the overall growth—in fact, net new supply in Q1 was only about $8 billion, the weakest quarterly expansion since Q4 2023. What really defines the current landscape is the internal reallocation of capital amid stagnating markets: yield-bearing stablecoins grew 22% in a single quarter, adding about $4.3 billion in market cap, contributing over half of the net increase in the stablecoin sector.

This isn’t just a simple product rotation. It’s a deep liquidity migration centered on capital efficiency, control over funds, and regulatory boundaries—on-chain funds are shifting from “static dollar holdings” to “holding a continuously earning on-chain dollar asset.”

However, as the growth curve steepens sharply, a policy countermeasure from the traditional financial system is accelerating in Washington. The prohibition of interest payments under the GENIUS Act, warnings about deposit outflows from banks, the repeated tug-of-war over yield boundaries in the CLARITY Act—yield-bearing stablecoins are caught in a dual squeeze of “regulatory benefits” and “policy risks.”

Is this the best arbitrage window before clear regulatory frameworks are established, or is it a structural risk point buried within the crypto financial system?

Key Figures for Q1 2026

Below are the core facts about the yield-bearing stablecoin track in Q1 2026:

• Total growth: Yield-bearing stablecoins grew 22% in Q1, with about $4.3 billion in new market cap.
• sUSDS leading: Sky ecosystem’s sUSDS absorbed over $2.5 billion in new funds in the quarter, surpassing the combined total of the next four yield-bearing stablecoins.
• USDY explosion: USDY from Ondo Finance grew over 150% in market cap, becoming one of the fastest-growing single assets in Q1. As of May 25, 2026, Gate data shows USDY’s current market cap is about $2.14 billion, with circulating supply around 1.89 billion tokens.
• Market size: As of mid-March 2026, the total size of yield-bearing stablecoins was approximately $21.5 billion, about 6.88% of the overall stablecoin market.
• Institutional entry: BIS data shows yield-bearing stablecoins grew from less than $1 billion in 2023 to over $19 billion by September 2025. A research report from State Street in April 2026 states that these stablecoins are shifting from trading convenience tools to globally accessible “cash + yield” instruments, directly competing with bank deposits and money market funds.
• Trading structure: About 76% of Q1 stablecoin trading volume was algorithm-driven, indicating a focus on yield and arbitrage rather than retail demand.
• Regulatory dynamics: The GENIUS Act was signed into federal law on July 18, 2025, explicitly prohibiting issuers from paying interest directly to holders. Implementation rules are being jointly developed by the Fed, FDIC, OCC, FinCEN, and OFAC, with most agencies’ rulemaking deadlines set for July 18, 2026.

From GENIUS to Yield Ban Controversy

Understanding the current situation of yield-bearing stablecoins requires tracing legislative evolution and policy battles from late 2025 to now.

| Date | Event | Impact Direction | | --- | --- | --- | | July 18, 2025 | GENIUS Act signed into federal law | Payment stablecoin issuers banned from paying interest directly | | July 17, 2025 | CLARITY Act passes House 294:134 | Comprehensive digital asset market structure legislation enters Senate review | | January 2026 | Senate Banking Committee cancels vote on GENIUS provisions; American Bankers Association issues deposit risk warnings | Large-scale banking lobbying begins | | March 4, 2026 | ICBA writes to Congress demanding a complete ban on yield payments | Deposit outflow model estimates: $1.3 trillion in deposits reduced, $85 billion in lending capacity lost | | March 2026 | Senate reaches preliminary compromise on yield issues | Ban on “passive balances” earning yield, allowance for “active use” of yields | | April 8, 2026 | White House Economic Advisory Council releases research | Yield ban would only increase bank lending by about $2.1 billion, with a net welfare cost of about $800 million | | April–May 2026 | Six bank trade groups pressure to remove compromise clauses; FinCEN/OFAC release draft PPSI compliance guidelines | Final text negotiations ongoing |

GENIUS’s “Ban” and “Loopholes”

The GENIUS Act establishes the first federal regulatory framework for US payment stablecoins. Its core requirements include: issuers must hold 1:1 full reserves, disclose reserve composition every 30 days, and complete redemptions within two business days.

But the most controversial clause explicitly bans issuers from paying any form of return to holders. However, the law’s scope applies only to “issuers,” leaving third-party platforms and DeFi protocols outside the ban—this structural space becomes the entire focus of subsequent battles.

Banking Sector’s Full Countermeasure

In early 2026, banking lobbying intensified sharply. On March 4, the Independent Community Bankers of America (ICBA) directly wrote to Congress demanding a complete ban on any form of “interest, yield, reward, or similar inducement payments.” Their macroeconomic model estimates that allowing yield payments could reduce community bank deposits by $1.3 trillion and decrease lending capacity by about $85 billion.

White House’s “Reverse Calculation”

On April 8, 2026, the White House Economic Advisory Council released a study providing a starkly different estimate: banning stablecoin yields would only increase US bank lending by about $2.1 billion (roughly 0.02% of total loans), and would impose a net welfare loss of about $800 million. The report subtly questions the empirical basis of the banking sector’s trillion-dollar warning.

As of May 2026, the legislative battle over yield-bearing stablecoins remains unresolved. The progress of the CLARITY Act in the Senate, the pressure from six bank trade groups to remove compromise clauses, and the final version of FinCEN and OFAC compliance rules will jointly determine the future development boundaries of this track.

Internal Sector Divergence: Hot and Cold

Total volume perspective: where does growth come from?

First, a key background must be clarified: the overall growth of the stablecoin market in Q1 2026 is essentially “capital reallocation,” not “net new entry.” The net new supply was only about $8 billion, with USDT’s supply shrinking by about $3 billion during the quarter—marking the first quarterly net contraction since Q2 2022. This further confirms the capital shift from non-yield stablecoins to yield products.

Divergence perspective: who is growing, who is shrinking?

Within yield-bearing stablecoins, the landscape is not uniformly prosperous but highly segmented.

| Project | Q1 2026 Performance | Features | | --- | --- | --- | | sUSDS | Absorbed over $2.5 billion in new funds | Treasury + Sky Vault hybrid yield, approx. 3.6–4% APY | | USDY | Market cap grew over 150% | Backed by short-term US Treasuries, token appreciation model | | USYC | About $1.4 billion inflow in 90 days | Circle’s Treasury product, institutional-led | | sUSDe | Decreased by about $1.8 billion in 90 days (down ~49% from peak) | Synthetic/Delta-neutral model, yield around 4% |

sUSDe’s contraction: not failure, but a change in structure

The most notable divergence signal comes from Ethena’s sUSDe. Its supply decreased by about 49% over 90 days, reducing roughly $1.8 billion. Tiger Research’s May 2026 report notes that the TVL decline in sUSDe isn’t capital outflow but internal reallocation within the same market. During the same period, USYC and sUSDS attracted about $1.4 billion and $1.2 billion respectively, exceeding sUSDe’s outflow.

Looking at 30-day annualized yields, sUSDe offers about 4%, higher than sUSDS’s ~3.6% and USYC’s ~3%. If capital simply chased higher yields, it should flow into sUSDe rather than out. The key factors determining the competitiveness of YBS products are no longer just APY levels but (1) whether the holder base is primarily institutional; (2) whether the underlying assets are verifiable and low-risk.

This signals a shift from “yield competition” to “trust competition” in the yield stablecoin market.

Risk Layering of Three Models

Government bond mapping—yield from external real assets

Representative products: USDY, USYC

Underlying assets are short-term US Treasuries, with yields derived from on-chain distribution of treasury interest. For USDY, its redemption value increases over time. USYC, as Circle’s Treasury product, reached a market cap of $2.9 billion on BNB Chain as of May 18, 2026, making it the largest tokenized T-Bill fund.

Core risks: (1) interest rate risk—if the Fed cuts rates sharply from the current 3.50–3.75%, yields will decline; (2) counterparty risk; (3) regulatory classification risk.

Hybrid model—Treasury + on-chain lending

Representative product: sUSDS

sUSDS’s yields are more mixed: mostly from US Treasuries and other RWA yields, plus on-chain lending yields from Sky Vault. In 2026, S&P granted the Sky protocol its first DeFi credit rating. As of May 15, 2026, sUSDS’s market cap was about $5.95 billion, hitting a new high on May 11.

Core risks: (1) on-chain lending default/bad debt risk; (2) insufficient risk isolation between RWA and on-chain parts; (3) protocol governance risk.

Synthetic/Delta-neutral—market supply/demand imbalance yields

Representative product: sUSDe (Ethena)

Uses a delta-neutral position holding spot longs plus perpetual futures shorts to capture funding rates. In Q1 2026, protocol revenue further declined to about $65.1 million, down 32% from the previous quarter. As of May 13, 2026, sUSDe’s yield was about 4%, significantly narrower from its peak. Ethena’s TVL shrank from about $15 billion in October 2025 to roughly $4.43 billion on May 6, 2026—a reduction of over $10 billion in seven months.

Core risks: (1) funding rate risk—returns depend entirely on market sentiment; (2) counterparty risk; (3) systemic risk—delta-neutral assumptions may fail under extreme volatility; (4) regulatory classification risk.

Divergent Narratives of the Three Forces

Banking system’s “systemic risk” narrative

Banks see yield-bearing stablecoins as a direct threat to deposit bases. ICBA explicitly labels them as “deposit substitutes,” emphasizing that allowing yield payments would “siphon deposits” and weaken community banks’ lending capacity.

From a motivation perspective, the banking sector’s interests are clear: with the federal funds rate still at 3.50–3.75%, stablecoin issuers can distribute Treasury yields to holders, while banks face regulatory costs and capital requirements that make matching such rates difficult. This constitutes a form of “regulatory arbitrage”—but the question remains: is the root cause overly lax regulation or inefficiencies within the traditional banking system?

Crypto industry’s “financial inclusion” narrative

Crypto advocates position yield-bearing stablecoins as “on-chain money market funds”—a financial tool enabling ordinary people to share in US Treasury yields. But this narrative has a core blind spot: the holder base of yield stablecoins isn’t “inclusive.” Tiger Research data shows USYC’s average holding size is about 800 times that of USDe—mainly benefiting institutions and high-net-worth individuals.

Research institutions’ “structural evolution” narrative

Tiger Research’s interpretation is especially critical: DeFi is shifting from a “market producing yields” model to a “market importing and distributing yields from traditional finance.” The essence of yield stablecoins isn’t native DeFi innovation but an on-chain pipeline for traditional financial yields—the more stable the foundation, the more robust the structure.

Industry Impact Analysis: Who Benefits, Who Loses

Internal sector divergence accelerates. Payment and settlement functions will continue to be dominated by traditional stablecoins (USDT, USDC), while asset management and wealth storage functions will gradually migrate toward yield-bearing stablecoins. The GENIUS “issuer ban” effectively accelerates this divergence.

DeFi protocols will undergo a yield source restructuring. Previously, DeFi yields mainly came from protocol incentives; moving forward, more will depend on “imported” yields from traditional finance—Treasury yields, money market yields, institutional lending. This requires deeper integration with traditional financial infrastructure and higher compliance thresholds.

Competition between banks and crypto enters an institutionalized phase. At the state level, several states are building legal frameworks for issuing deposit tokens. In the long run, the winners may not be strictly “crypto-native” or “bank-backed,” but those products that can meet both compliance and capital efficiency demands.

Substantive impact on institutional investors

Idle stablecoins shifting from zero yield to earning yields significantly boosts the capital efficiency of on-chain strategies. State Street and Galaxy jointly launched the SWEEP fund in May 2026, allowing institutional investors to “one-click” transfer stablecoins into yield-generating on-chain strategies. For emerging-market institutions, yield-bearing stablecoins become a dual tool for dollar exposure and dollar yield, bypassing traditional banking capital controls and intermediaries.

Conclusion: Benefits Beneath Risks

The start of 2026 for yield-bearing stablecoins is destined to be recorded as a pivotal moment in crypto finance history. The net increase of $4.3 billion in a single quarter, explosive growth of sUSDS and USDY, and the trust substitute of Treasury-backed models over synthetic ones—these changes together sketch a trajectory of the sector moving from fringe to mainstream.

But “regulatory benefits” are always a double-edged sword. The current window exists precisely because the regulatory framework isn’t finalized—legislators are still balancing “maintaining financial stability” and “embracing innovation.” Once the framework is set, all current arbitrage assumptions may be rewritten.

For market participants, the core question isn’t whether “yield-bearing stablecoins are good or bad,” but whether the yield sources of your holdings can still hold under the strictest regulatory standards. Treasury-backed stability, synthetic models’ flexibility, or hybrid approaches—all entail different risk-return profiles.

Until the regulatory pendulum finally settles, perhaps the safest strategy isn’t chasing the highest APY but holding those “compliant even under the strictest regulation” yield assets. Because in the world of digital assets, compliance itself is becoming the most scarce yield factor.