Yield Restrictions and the Funding of Stablecoin Settlement

Regulators are prohibiting stablecoin issuers from paying yield, expecting safer issuers. We show when the prohibition achieves the opposite. Remunerated liquidity migrates to wrappers, intermediated claims backed by the restricted token, which pre-position cash either by redeeming tokens with the issuer, shrinking its reserves before stress, or by placing tokens with outside investors. When those investors earn the restricted payout, worse recovery beliefs and tighter restrictions both redirect wrapper funding toward redemption. This funding flight can reverse the policy: in a certified open family of fully endogenous economies, it alone makes the restriction worsen issuer recovery at the stable safe equilibrium, and the reversal region grows with the restriction’s coverage of indirect payouts. Settlement design is the countermeasure. Issuer exposure scales once with the share of tendered tokens finally debited and the belief feedback scales with its square, so netting is a targeted instrument: in the embedded benchmark it restores uniqueness without closing either funding route, and in the certified economies lower finality restores the intended policy sign. Public data discipline the magnitudes without testing the policy: on-chain wrappers hold about a sixth of USDC circulation, the payout at stake is 370 to 520 basis points, and the March 2023 stress window supplies the price and primary-market quantity moments the routing mechanism must match.