The financial architecture of fiat-backed stablecoins rests on an operational principle rarely made explicit in issuers’ commercial documentation: the yield generated by reserves of U.S. sovereign debt does not belong to the token holder.
The GENIUS Act, enacted in July 2025, codified this reality by explicitly prohibiting payment stablecoin issuers from paying any form of interest or yield to holders solely for maintaining the token. The result is a business model in which the issuer captures the entire spread between the cost of issuing a zero-rate liability and the return on the assets backing it.
Operational Mechanics of the Reserve Spread
The model is structurally simple. A user deposits dollars with the issuer and receives a token designed to maintain parity with the dollar. The issuer uses those dollars to purchase short-term Treasury bills or money market fund shares.
The bills generate interest; the holder receives nothing. With an aggregate market capitalization of approximately $310 billion and an average reserve yield of 3.5% to 4%, the industry generates between $10 billion and $13 billion annually in reserve income without returning a cent to holders.
To gauge the magnitude, every 25 basis point increase in the benchmark rate adds approximately $775 million in additional annual opportunity cost for holders.
Tether: Margin Without Intermediaries
Tether, the issuer of USDT, operates with the most favorable retention structure in the sector. As of the end of the first quarter of 2026, the company reported exposure to Treasury bills of approximately $141 billion, positioning it as the seventeenth-largest holder of U.S. government debt globally. Its net profit in the first quarter of 2026 reached $1.04 billion, with excess reserves totaling $8.23 billion.
Tether’s structural advantage lies in the absence of a distribution partner comparable to Coinbase in scale. This position allows it to retain approximately 3.0 to 3.5 cents per dollar annually in reserve income, compared to the 0.8 to 1.0 cents retained by Circle.
Circle: The Cost of Distribution
Circle, the issuer of USDC, presents a significantly more compressed margin structure. In fiscal year 2025, the company generated $2.75 billion in total revenue, of which $2.64 billion—96%—came from reserve income. However, distribution and transaction costs consumed $1.66 billion, including approximately $1.36 billion paid to Coinbase.
The result was a net loss of $70 million, although adjusted EBITDA reached $582 million. This asymmetry between gross revenue and net profitability illustrates how the value of reserve yield is distributed along the intermediation chain before reaching, if at all, the issuer’s shareholders.
The Circle-Coinbase Agreement: Anatomy of Intermediation
The collaboration agreement between Circle and Coinbase, automatically renewed in August 2026 for an additional three-year period under the original 2023 terms, establishes two differentiated revenue-sharing streams.
For USDC held on Coinbase’s platform, the entirety of reserve interest income corresponds to the exchange. For USDC held outside both platforms, Coinbase receives 50% of residual reserve income.
The renewed terms added 60-day and 90-day cure windows before Circle can issue an exclusion notice on a payment stream, although Coinbase remains entitled to affected payments for up to 12 months.
Coinbase’s weight in USDC distribution is material: its products held an average of $20 billion in USDC during the second quarter of 2026, with quarter-end holdings exceeding 30% of all USDC in circulation.
The GENIUS Act and the Yield Prohibition
Section 4(a)(11) of the GENIUS Act establishes that no permitted payment stablecoin issuer shall pay the holder “any form of interest or yield” solely in connection with holding the token. The legislation defined stablecoins as payment instruments, not as financial products that accrue interest.
Secondary rulemaking has advanced during 2026 with proposals from the Federal Reserve, the OCC, and the FDIC that explicitly address circumvention mechanisms.
The Federal Reserve’s proposal, published in September 2026, establishes that “certain types of arrangements involving third parties would be presumed to be prohibited payments of interest or yield”, aligning with the OCC’s approach. The FDIC has received comments urging it to define “interest or yield” to include “any economic benefit linked to the balance or holding period of a stablecoin”, closing the path for reward programs executed through affiliates.
Circumvention Structures and the Regulatory Response
The statutory prohibition has not eliminated competition for yield; it has displaced its execution toward intermediation structures.
Coinbase pays USDC holders 3.5% APY positioned as loyalty rewards, arguing that a non-issuer distributor offering incentives falls outside the scope of the prohibition. PayPal offers 3.7% on PYUSD under a similar framework, and Kraken remunerates holders of USDG through its “Global Dollar Rewards” program.
The OCC and FDIC have proposed rules that treat indirect payments as violations of the prohibition, and GENIUS Act rulemaking is scheduled to take effect in January 2027. The regulatory tension centers on whether the payment vehicle—the distributor—can do what the issuer is prohibited from doing, or whether the economic substance of the yield prevails over the contractual form.
The business model of Treasury-backed stablecoins presents a critical dependence on monetary policy. A 100 basis point reduction in the Federal Reserve’s benchmark rate reduces Circle’s annual reserve income by approximately $730 million at current circulation.
For Tether, the same reduction would compress a margin that already operates with a structural advantage derived from the absence of distribution partners. Sector profitability is, in net terms, a function of the spread between the risk-free rate and the cost of distribution, not of issuers’ operational efficiency.
Future competition will likely shift toward reducing distribution costs and differentiating through tokenized yield products, a segment that has grown from less than 0.5% to more than 5% of total stablecoin value in circulation.
The yield on the Treasuries backing stablecoins flows to the issuer and, in distribution-intensive structures such as Circle’s, to the intermediaries that control access to the end user. The GENIUS Act legally consolidated this allocation by prohibiting the direct transmission of yield to holders.
The relevant question for the sector is not whether this structure will change—current legislation sustains it—but how competition will evolve when rate reductions compress issuers’ margins and distributors face regulatory pressure on circumvention mechanisms.
The stablecoin holder, under the current framework, possesses a payment instrument with guaranteed parity and zero residual claim on the yield of the assets backing it.
