Former Standard Chartered tokenization head warns: can stablecoins offer returns without sacrificing safety?
A key figure from the traditional banking world has issued a warning: in today’s market, stablecoins that don’t offer a competitive return will struggle to hold their own. Savers now expect their money to work for them, and idle cash—even if it’s digital—faces stiff competition from both high-yield bank accounts and DeFi opportunities. The central question is whether a stablecoin can offer that yield without compromising the very safety and regulatory compliance that makes it stable.
Main idea
The argument is straightforward: to be truly useful as a modern store of value and medium of exchange, stablecoins need a value proposition beyond just stability. Mechanisms that build in yield or easily connect to decentralized earning opportunities are becoming essential to attract and keep capital. Simply holding a static digital dollar is no longer enough for many users.
Risks and limits
Pursuing yield inevitably introduces new risks. This includes the smart contract risk of the protocols generating the yield, the liquidity risk of not being able to access funds quickly, and the counterparty risk of who ultimately holds the assets. Crucially, this also draws intense regulatory scrutiny. When stablecoins start acting like banks by paying interest, regulators take notice. Any design offering returns must be built on a foundation of clear collateral, regular audits, and strong protections against a bank run.
Technical and market approaches
Some potential solutions are emerging, each with trade-offs:
Hybrid Models: These aim to balance security and yield by backing the coin mostly with safe, liquid assets (like government debt) and using a smaller portion to generate returns.
DeFi Composability: This approach keeps the base coin simple but lets users easily put their tokens to work in external protocols to earn yield themselves—though this adds complexity and risk.
Centralized issuers face a higher burden of trust and regulation, while decentralized protocols exchange that for a different set of technical vulnerabilities.
Implications for issuers and users
For issuers, transparency is non-negotiable. They must be crystal clear about how the yield is generated, how the reserves are managed, and what risks are involved. The promise of return must be matched by visible governance and oversight.
For users, the choice becomes more nuanced. It’s no longer just about picking a stablecoin; it’s about understanding the trade-off between risk and reward. The sensible choice will depend on one’s own risk tolerance, need for quick access to cash, and comfort level within the current regulatory landscape.
In summary, offering returns can make stablecoins far more competitive and useful, but it fundamentally changes their risk profile. Their long-term resilience will depend on successfully balancing the trio of return, safety, and compliance.
