Banking groups seem to be moving against the CLARITY Act, demanding new language to the legislation to ban stablecoins from offering yields. Let’s discuss why the traditional banking sector is spooked about stablecoins, and what may happen next. Let’s discuss what stablecoin yields are, and if they are dangerous. Also, will policymakers give in and introduce new language?
Stablecoin Yields Explained: Why Are Traditional Banks Spooked?
Stablecoin profits may confusing for many, given that the coin itself is pegged to a fiat currency, which remains constant. However, yields are generated when you deposit your fiat-pegged coin into a lending protocol, liquidity pool, or yield-bearing account. The yield is often expressed as an annual percentage yield (APY). For example, a 5% APY on $1 million worth of USD Coin (USDC) means you can earn more than $50,000 in annual earnings.
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Stablecoins have often offered higher yield than what traditional banks have offered on savings accounts. The traditional banking sector is likely worried that their low-yield savings accounts would become less attractive to clients. The same clients may then jump ship and move to stablecoins.
Risks You Should Know
Stablecoins that have actual fiat backing are more-or-less safe. However, some stablecoins, especially algorithmic stablecoins are quite risky. The Terra-Luna stablecoin collapse of 2022 is a good example to showcase how algorithmic stablecoins may enter a death spiral.
Terra USD (UST) was the stablecoin offered by the project. However, the Anchor Protocol, a DeFi lending platform, offered a high 20% APY on UST deposits. The high APY attracted billions of dollars into the platform. However, experts warned that their reward model was not sustainable. Eventually, large investors began to withdraw from the liquidity pool, and UST began de-pegging from the US dollar. UST eventually collapsed the projects faced a major bank run.
It is very important for investors to do due diligence before putting their money into crypto projects, including stablecoins. Be sure to check if the coin has proper backing and is transparent about its reserves.
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