China's Digital Yuan with Interest Pressures US Stablecoin Regulations

China Allows Banks to Pay Interest on Digital Wallets

China's decision to allow banks to pay interest on digital yuan wallets has intensified debates in Washington regarding the competition between dollar-linked stablecoins and the global financial system. Starting January 1, commercial banks will be able to offer interest on e-CNY wallet balances, and Chinese officials argue that this move will facilitate the integration of the central bank-issued digital currency into banks' balance sheets.

Coinbase CEO Brian Armstrong has warned that this move gives China a "competitive advantage" over dollar-based stablecoins, emphasizing that the prohibition on interest established by the GENIUS Act leaves US stablecoins "uncompetitive."

Impact of the GENIUS Act on US Stablecoin Stability

In July 2025, the GENIUS Act established a federal framework for dollar-linked stablecoins but included a clause banning issuers from paying "any form of interest or yield." Banking lobbyists seek to extend this prohibition to third-party platforms, fearing that rewards from stablecoins will siphon deposits from the traditional banking system.

Cryptocurrency executives have warned that banning yields on stablecoins could strengthen banks while weakening the competitiveness of the dollar, simultaneously providing an edge to China's interest-bearing digital yuan.

New Stablecoin Models in a Changing Economic Environment

Ron Tarter, CEO of MNEE, a dollar-linked stablecoin issuer, stated that a weaker dollar in 2026 might prompt US legislators to view dollar-denominated stablecoins as "strategic tools to maintain dollar hegemony in global trade."

Reeve Collins, co-founder of Tether, highlighted that the value proposition of stablecoins has shifted from quick access to preserving purchasing power and combating inflation.

Political Perspectives and Regulatory Risks

Analyzing the political landscape and the anticipated poor performance of Republicans in the 2026 elections, Drew Hinkes, a partner at Winston & Strawn law firm, noted that a repeal of the GENIUS Act is "very unlikely," but a shift in control of Congress could complicate the adoption of new market regulations.

Tarter added that crypto companies should operate on the assumption that the GENIUS Act will remain in effect and that the Clarity Act will be adopted before the elections.