The pitch is hard to argue with on the surface. A regulated US bank pays you something approaching the federal funds rate on a checking balance, minus the considerable margin the bank keeps. A money-market fund pays close to the federal funds rate, minus a few basis points of management fee. A custodial crypto platform offers you something in the same neighbourhood, often slightly higher, on a dollar-pegged token called a stablecoin. The platforms call it "yield" or "rewards." The functional experience, viewed from a phone screen, is identical to interest on a savings balance.
The mechanism behind the number is not identical, and the regulatory protection that sits behind it is not identical either. This piece walks through both, using the public disclosures of the largest issuers and platforms as the source material.
Step one: what a stablecoin actually is
A stablecoin is a token issued on a blockchain by a private company that promises, contractually and in writing, to redeem each token on demand for one US dollar. The two largest by market value are USDC, issued by Circle Internet Financial, and USDT, issued by Tether Limited. Together they account for the majority of stablecoin supply in circulation and have done so for several years.
The promise to redeem at par is backed by a reserve. Circle publishes a monthly attestation of the USDC reserve, prepared by Deloitte and Touche LLP, on its public transparency page. As of the most recent attestation cycle, the USDC reserve consists primarily of short-dated US Treasury bills held in a dedicated SEC-registered government money-market fund (the Circle Reserve Fund, ticker USDXX) and cash held at regulated US banks. The composition is published in detail and updated each month.
Tether publishes a quarterly attestation of the USDT reserve, prepared by BDO Italia, on its transparency page. The composition has historically been more varied than Circle’s, and Tether has been the subject of two notable enforcement actions: a 2021 settlement with the New York Attorney General that required disclosure changes and an $18.5 million payment, and a 2021 settlement with the US Commodity Futures Trading Commission that resulted in a $41 million payment over reserve representations made between 2016 and 2018. Neither action questioned the existence of reserves; both questioned their composition and disclosure at specific points in time.
The relevant point for this article is that holding a stablecoin is, in the most literal sense, holding a private credit instrument issued by a fintech company. The dollar peg is a contractual promise, not a deposit relationship, and the soundness of the peg depends on the soundness of the issuer’s reserve and the issuer’s ability to meet redemption requests in a stress event.
Step two: where the yield comes from
You do not earn yield by holding a stablecoin in your own wallet. The token sitting in a self-custodied address pays you nothing, exactly as a paper US dollar pays you nothing.
You earn yield only when you transfer the stablecoin to a third party that promises to pay you for it. The third party can be one of two things:
- A centralised custodial platform. Coinbase publishes a USDC rewards rate that it pays to retail customers who hold USDC in their Coinbase accounts. The rate is variable and is published on the platform. The economics, as Coinbase discloses in its user agreement, are that Circle pays Coinbase a share of the interest earned on the underlying reserve, and Coinbase passes a portion of that to the customer. The rate the customer sees is therefore connected to the prevailing US short-rate, less the share that Circle keeps and less the share Coinbase keeps.
- A decentralised lending protocol. Aave is the largest example by total value supplied. The customer transfers their USDC to a smart contract, which lends it to other users of the protocol who post collateral worth more than they borrow. The borrower pays a rate set by the protocol’s utilisation curve, and the lender receives most of that rate, less a small protocol fee. The rate is visible in real time on app.aave.com and on dozens of dashboards that index the on-chain data.
Both routes deliver something that looks like a savings rate to the customer. Both routes carry risks that a bank deposit does not.
Step three: the four risks that a savings account does not have
A US bank deposit, up to USD 250,000 per depositor per institution, is insured by the Federal Deposit Insurance Corporation. The deposit is a senior unsecured liability of a regulated bank, and in the event the bank fails, the FDIC pays out within days. The customer does not need to read the bank’s reserve composition or its lending policy to be confident the money is there.
None of the three layers above apply to a stablecoin yield product. Specifically:
- Issuer risk. The stablecoin itself is only as good as the issuer’s reserve and the issuer’s willingness to honour redemption. In March 2023, USDC briefly traded as low as USD 0.87 on secondary markets after Circle disclosed that USD 3.3 billion of its reserve was held at Silicon Valley Bank, which had failed. The peg was restored within days when the US Treasury, Federal Reserve and FDIC announced that all SVB depositors would be made whole. The episode illustrates the structural point: even a stablecoin backed primarily by short Treasuries can momentarily depeg if any portion of the reserve is held at a bank that fails.
- Platform risk. The custodial platform you transfer your stablecoin to is itself a private company, with its own balance sheet and its own counterparties. The 2022 cycle of failures, which included Celsius, Voyager and BlockFi (all of which advertised stablecoin yields to retail customers in the 6 to 9 percent range in the years before they failed), left customers as unsecured creditors of the failed entities. Recovery in those bankruptcy proceedings has been partial and slow.
- Smart-contract risk. A decentralised lending protocol is software. If the software has a bug that an attacker can exploit, funds can be drained. The Rekt News public database catalogues hundreds of incidents in which lending protocols, bridges and yield aggregators have lost customer funds to exploits. Audited, established protocols are less likely to suffer this fate than unaudited new ones, but the residual risk is not zero, and there is no insurance scheme that covers it the way the FDIC covers a bank deposit.
- Regulatory risk. In the United Kingdom, the Financial Conduct Authority’s policy statement PS23/6, in force since October 2023, treats crypto interest accounts as restricted mass-market investments. UK retail customers see warnings and friction screens when offered such products, and several offerings were withdrawn from the UK market in response. The US Securities and Exchange Commission charged BlockFi in February 2022 with offering unregistered securities through its interest accounts, resulting in a USD 100 million settlement and the discontinuation of the product to US retail customers. The regulatory direction in most developed jurisdictions has been to bring these products inside the existing investor-protection frameworks, with corresponding restrictions on who can be marketed to and what disclosures are required.
What this looks like in practice
Suppose you have USD 10,000 you want to keep liquid for the next twelve months. You compare three options.
| Option | Indicative yield | Insurance / protection | Counterparty |
|---|---|---|---|
| FDIC-insured high-yield savings | Tracks Fed funds, less the bank’s margin | FDIC, up to USD 250,000 | The bank, balance-sheet protected |
| SEC-registered government money-market fund | Tracks Fed funds, less ~10 to 20 bps in management fee | SIPC at brokerage; Rule 2a-7 portfolio constraints at fund level | The fund, holding US Treasuries |
| Stablecoin yield on a custodial platform | Often slightly higher than money-market funds, variable | None of the above; covered only by the platform’s own terms | The platform plus the stablecoin issuer |
The yields, on a typical day, are close enough that the choice is not really a yield decision. It is a question of which set of risks the customer is willing to take in exchange for the convenience of the product. The customer who chooses the stablecoin route in 2026 is, in most cases, doing so because they are already inside the crypto ecosystem and the funds are already in stablecoin form, not because the yield itself is the binding consideration.
The line we recommend drawing
If the use case is "I want a savings account," the answer is a savings account, with deposit insurance and a regulated counterparty. The yield foregone, in basis points, is the cost of the protection.
If the use case is "I have working capital denominated in stablecoins, and I would prefer not to leave it idle," the answer can reasonably be a custodial yield product on a regulated platform with audited reserves, with a clear understanding that the four risks above apply, and with an allocation sized to a loss the customer can absorb without rearranging their life. That is a different answer from the savings account answer, even though the rate on the screen looks similar.
The disclosures the platforms publish are good enough to make this decision properly. They are also long enough that almost no customer reads them. The single most useful thing a customer can do before clicking "Earn rewards" is to open the platform’s terms of service, search the document for the word "insurance," and read the paragraph that follows. The answer, in almost every case, will be that the product is not an insured deposit and that the customer assumes the risk of loss. That sentence is the one that should set the size of the position.