Crypto’s CLARITY Act may pose challenges for DeFi tokens securing yields, according to an analyst.

According to Markus Thielen from 10x Research, the suggested limitation on yield would redirect value towards regulated entities and diminish the prominence of decentralized finance tokens.

(James Coleman/Unsplash)

Key points:

• The CLARITY Act would prohibit yield on stablecoins, classifying them as payment instruments rather than savings vehicles.
• If the proposal is enacted, it may re-centralize yield within traditional finance and regulated offerings, presenting challenges for decentralized finance (DeFi), according to Markus Thielen from 10x Research.
• This change would advantage Circle (CRCL) and regulated frameworks, while negatively impacting DeFi tokens, Thielen remarked.

The current iteration of the crypto legislation Clarity Act is receiving attention primarily due to its regulations regarding stablecoins. In effect, it may have the most significant impact on decentralized finance (DeFi) and associated tokens, as reported by 10x Research.

Central to the proposal is a prohibition on providing yield—or any similar incentives such as rewards—on stablecoin holdings. This effectively terminates the notion of stablecoins as on-chain savings assets and redefines them solely as payment mechanisms.

"This signifies a distinct re-centralization of yield," stated Markus Thielen, founder of 10xResearch. He explained that the proposal redirects yield back to banks, money market funds, and regulated products, leaving crypto-native platforms with diminished capability to compete on returns.

This transition could also adversely affect DeFi, which initially had the potential to benefit.

The reasoning was that if centralized platforms were unable to provide yield, users would migrate to on-chain options, Thielen noted.

However, this presumes that DeFi would not be subjected to the same regulations. In practice, the Clarity framework is likely to apply to front-end interfaces and token structures, particularly where fee generation or governance begins to resemble equity, he added.

This scenario places a broad range of the sector under scrutiny. Decentralized exchanges like Uniswap (UNI), SUSHI$0.1896 and dYdX (DYDX), along with lending protocols such as Aave AAVE$95.41 and COMP$18.29, may face stricter regulations regarding their operations and value distribution, the report indicated. Consequently, this could lead to decreased volumes, reduced liquidity, and lower demand for tokens.

Conversely, the suggested regulation is "structurally bullish" for infrastructure entities like Circle (CRCL), as it integrates stablecoins more deeply into payment systems, Thielen noted.