An illustration of the Bitcoin spot ETF.
Crypto ETFs have come a long way, even though it’s only been less than 4 years since the first Bitcoin futures ETF was introduced. After years of legal resistance, spot Bitcoin ETFs finally hit the US markets in early 2024, bringing in billions in capital inflows. As of now, the landscape includes a mix of futures-based products, spot ETFs for BTC and ETH, and, what’s interesting, a growing demand for a broader crypto exposure. Recent filings for ETFs representing assets like XRP, AVAX, APTOS, SUI, and even memecoins like PENGU or DOGE raise questions about strategy and, rightfully so, the intent behind them. Some of these companies, such as Ripple and Avalanche, have strong ecosystems with long-lasting commitments. Others—like Dogecoin or Pudgy Penguins—are driven more by community hype than fundamentals. So, what is the driver behind institutions filing for such ETFs?
Part of it is seizing the opportunity when the time is ripe. As the SEC begins to approve more crypto ETFs, issuers rush to be among the first to launch an instrument that has the potential to gain traction beyond the crypto space. Another, equally important angle is diversification, which guarantees a broad spectrum of risk-reward profiles for different client segments. However, it’s also possible that they’re strategic plays on brand visibility rather than a measure of product readiness in traditional finance. In contrast, stablecoins have found their product-market fit and are grounded in utility, spanning the entire blockchain industry, not just the DeFi sector.
Stablecoins like USDC and USDT already play a significant role in the cryptocurrency market. They provide liquidity, price stability, often serving as on- and off-ramps. What many still fail to notice is a prominent movement away from vanilla stablecoins to yield-bearing stablecoins, which have surged to an 11 billion market size, constituting a 4.5% market share.
Not Just Any Stablecoin
The CEO of Pheonix Labs, core contributor to Spark, Sam MacPherson, pointed out in one of his interviews how we need to “grow the pie of DeFi” with ETFs as an instrument to secure inflows into digital assets.
In the case of an interest-generating stablecoin ETF, it could provide exposure to DeFi-native strategies via providing liquidity to high-yielding positions. What’s important to note is that yield-bearing stablecoins can be categorized depending on their own mechanism for generating returns.
T-bill-backed stablecoins, such as USDY from Ondo Finance, derive their yield from short-term U.S. Treasury bills, essentially functioning like tokenized money market funds. For a stablecoin ETF to make economic sense, the yield would have to be significantly more attractive than a risk-free rate, which currently sits at 4.24% per annum and is mirrored by USDY. However, there are other categories. Mixed yield source stablecoins, such as USDS from Sky Ecosystem, which blend returns from a variety of sources, including staking and lending. Arbitrage-based stablecoins, like USDe from Ethena, rely on sophisticated trading strategies to find inefficiencies between derivatives and spot markets. Finally, debt-backed stablecoins, like crvUSD from Curve, are minted against collateral and earn yield through lending protocols. In comparison to RWA-backed models, these tend to be more dynamic and DeFi-native, which makes them more likely to be wrapped by an ETF.
Stablecoin ETF, Not So Simple
Across the current ETF offerings, wrapping an interest-bearing token is a compelling middle ground. It’s neither the volatility of BTC or ETH, nor the near-zero return of cash or vanilla stablecoins. Think of it as an alternative somewhere between these two options. Just like stablecoins are considered tokenized cash or money market funds, this ETF would turn stablecoins into a more formalized, yield-generating asset class for traditional finance.
As spot crypto ETFs mature, investors are actively seeking risk premiums with greater stability. In a market where crypto narratives evolve quickly, a yield-bearing stablecoin ETF could be the next wave, offering crypto-originated income that is not purely speculative in its own. However, it is never that simple. The US regulators and the Stablecoin Act, which suggested banning yield-bearing stablecoins, will undoubtedly create a friction for such an ETF. This, in turn, may lead to bringing more structure to this sector of digital assets or will allow other jurisdictions to capture investor appetite. While the idea of a yield-bearing stablecoin is interesting, the regulatory aspect will ultimately make or break it.