The regulatory paradox of USDe: banned in Europe, yet widely adopted by US institutions.

Written by: Zennon Kapron, Forbes Contributor

Translated by: AididiaoJP, Foresight News

When Congress drafted the GENIUS Act, it drew a clear line for stablecoins: licensed payment stablecoin issuers are prohibited from paying any form of interest or returns to holders. This clause (Section 4(a)(11)) forced Circle and Coinbase to completely adjust the way USDC holders earn returns.

However, the fastest-growing yield dollar in the crypto space—USDe from Ethena—completely bypassed this clause.

The core mechanism and regulatory gap of USDe

USDe does not hold cash or treasury bonds. It is a delta-neutral synthetic dollar: the protocol collects crypto collateral while issuing hedged perpetual futures short positions, allowing the dollar value to remain relatively stable while earning returns from the positions. By staking USDe as sUSDe, you can receive these returns.

Because its underlying structure is based on hedged derivative trading rather than fiat reserves, USDe does not fit the legal definition of a payment stablecoin. Therefore, the prohibition outlined in the GENIUS Act that reshapes USDC does not apply to USDe at all.

The result is: tens of billions of dollars lie in a regulatory gap, and it continues to grow, while policy discussions remain focused on stablecoins complying with the new rules.

Growing from a fringe product to the top three

This is not a fringe product. By 2025, USDe's supply peaked at over $14 billion, accounting for about 5% of the entire stablecoin market. CoinDesk had already labeled it the third-largest dollar-denominated crypto asset. After deleveraging in October 2025, the supply contracted to about $5.9 billion and has remained at that level.

Even with its scale reduced, it remains the only non-fiat reserve stablecoin that ranks among the leaders. All other similarly sized dollar stablecoins are reserve coins holding cash and government bonds. USDe is essentially a trading strategy that just incidentally minted a token.

In January 2026, it partnered with Kraken to introduce custody and provide weekly reserve proofs, further solidifying the reputation that cannot be fully provided by basis trading alone.

Where do the yields actually come from?

These yields come from one of the oldest derivative structures—cash and basis trading. When perpetual funding rates are positive, longs pay shorts, and USDe’s hedged short positions can profit from this, adding the staking yields from the collateral.

Ethena describes this as funding rates from delta-hedged derivatives and basis spreads; CoinDesk is more straightforward: USDe generates yields by harvesting funding rates. By early 2026, the annualized yield of staked sUSDe was around 4%.

This is the legal core of the entire design: the issuer does not pay interest on reserves (which the GENIUS Act prohibits). Instead, a strategy generates returns, and the token just conveys it—there are no regulations from the GENIUS Act regarding this.

This technical distinction, though it sounds subtle, constitutes the entire boundary between regulated and unregulated products.

Definitions not covered by the GENIUS Act

The GENIUS Act only regulates payment stablecoins, demanding 1:1 fiat or treasury reserves and enforcing monthly disclosures. USDe does not fit these requirements at all and has never attempted to comply.

In response to the US market, Ethena launched a second independent product: USDtb—a fiat-backed stablecoin issued in collaboration with Anchorage Digital, fully compliant with the GENIUS Act and mainly supported by BlackRock's tokenized money market fund.

Thus, Ethena operates two types of dollars simultaneously: one is a compliant, non-yield-paying payment stablecoin; the other is a yield-paying synthetic dollar.

The US Office of the Comptroller of the Currency (OCC) has noticed this gap. Its March 2026 proposal attempted to extend the yield prohibition to affiliates and third parties, but even so, it mainly targets situations where issuers pay yields through side doors. It clearly cannot cover instruments where “the issuer pays no yields, and returns come solely from the market.”

To truly fill this gap, regulators must define synthetic dollars as a separate category and regulate them, but so far, no one in Washington has written this rule.

Risks of basis trading

This model has real failure modes, which should be clearly pointed out before USDe expands again: its strategy heavily relies on funding rates remaining positive over the long term.

Ethena's own data shows that over three years, 17.5% of days saw cumulative funding rates on Ethereum positions turn negative, with the longest negative streak lasting 13 days and the longest positive streak lasting 176 days. The reserve fund absorbs the negative yield periods, so stakers will not be charged.

The real danger is that prolonged negative funding rate windows coincide with global DeFi leverage liquidations. The market flash crash on October 10, 2025, was a test when USDe briefly fell to $0.97, then recovered within hours.

Reserve stablecoins collapse when there are issues with custodial banks or institutions; synthetic dollars collapse during crowded liquidations—this is a different and more insidious risk, and it can occur without any mistakes being made.

Europe says no, US institutions say yes

Regulators have not reached a consensus. Germany's BaFin forced Ethena to close its local entity and banned the public sale of USDe, citing allegations of selling unregistered securities and inability to meet MiCA reserve requirements. Ethena became the third stablecoin issuer pushed out by the European Union.

On the other hand, US institutional funding has taken the opposite direction. In June 2026, Janus Henderson, managing approximately $480 billion, partnered with Ethena to use USDe for treasury cash management and included tokenized AAA credit products in the USDe reserve, while planning to launch a regulated exchange-traded product in the second half of the year.

One major market sees this synthetic dollar as an unregistered security, while another integrates it into the infrastructure of a half-trillion-dollar asset management firm. Both cannot be correct long-term.

The positive arguments for basis trading dollars

The strongest bullish argument is that USDe has won existing scale through its strength. It has maintained its peg over multiple cycles, is over-collateralized, and has external proof that the yields it pays come from real markets rather than subsidies that issuers must eventually stop.

The demand for yield dollars will not disappear just because Congress wants it to vanish; pushing this demand overseas or outside labels won't make it safer.

The issue is not that USDe is fraudulent, but that it is sold alongside tools that are nothing like it, yet share the “stablecoin” label, while the law has defined them as something else.

Treating USDe and USDC as interchangeable holders effectively prices derivative positions as if they were checking accounts.

The GENIUS Act has regulated one type of product while not defining another, silently fostering this confusion rather than clarifying it.

The GENIUS Act clarifies what payment stablecoins are, what they cannot do, yet it does not touch on those tools that reject this label. USDe is the largest among them. The next open question for US regulators is whether the next rule will define boundaries for synthetic dollars, or if yields will continue to migrate to places they have already drawn boundaries beyond.