Commenter: James Harris, Tesseract Group CEO
In an environment of shrinking margins and increasing competition, yield is no longer an option. It has become a necessity.
This gold rush mentality obscures important truths that will define the future of the industry. That said, not all yields are created equal. The market’s obsession with headline returns leads financial institutions to catastrophic losses.
On the surface, this industry is full of opportunity. The protocol touts double-digit returns. A centralized platform promotes simple “profitable” products. The marketplace promises instant access to borrowers.
These disclosures are not a welcome nuance for serious institutions, but a critical issue that marks the line between fiduciary duty and unacceptable disclosure.
MiCA reveals industry regulatory gaps
The European Market for Cryptoassets (MiCA) framework has brought about structural changes. For the first time, digital asset companies can receive authorization to offer portfolio management and yield services, including decentralized financial strategies, across the EU’s single market.
This regulatory clarity is important because MiCA is more than just checking a compliance box. This represents the minimum threshold required by each institution. However, the vast majority of yield providers in the cryptocurrency space operate without oversight, exposing financial institutions to potentially costly regulatory gaps.
The hidden cost of “set it and forget it”
The fundamental problem with most crypto yield products lies in their risk management approach. Most self-service platforms push important decisions onto clients who don’t have the expertise to assess what they’re actually being exposed to. These platforms expect treasuries and investors to choose which counterparties to lend to, which pools to participate in, and which strategies to trust. This is a tall order when boards of directors, risk committees, and regulators demand clear answers to fundamental questions about asset custody, counterparty exposure, and risk management.
This model creates a dangerous illusion of simplicity. Behind the user-friendly interface and attractive annual percentage yield (APY) display is a complex web of smart contract risks, counterparty credit exposures, and liquidity constraints that most financial institutions cannot adequately assess. As a result, many financial institutions unwittingly take on exposures that are unacceptable within traditional risk frameworks.
Alternative approaches of comprehensive risk management, counterparty scrutiny, and institutional-level reporting require significant operational infrastructure that most yield providers simply do not have. The gap between market demand and operational capacity explains why many crypto yield products fail to meet institutional standards, despite aggressive marketing claims.
APY optical illusion
One of the most dangerous misconceptions is that a higher advertised APY automatically indicates a better product. Many providers lean into this dynamic, driving double-digit returns that appear superior to more conservative alternatives. These headline numbers almost always hide hidden layers of risk.
Related: Bringing Asian institutional yield to the on-chain world
Behind attractive interest rates often lurk unproven decentralized finance (DeFi) protocols, smart contracts that have not weathered market stress, token-based incentives that can disappear overnight, and large embedded leverage exposures. These are not abstract risks. They represent exactly the factors that led to significant losses in previous market cycles. Such undisclosed risks are unacceptable to institutions accountable to boards of directors, regulators, and shareholders.
The impact of this APY-focused approach on the market is becoming increasingly clear. As adoption by institutional investors accelerates, the gap between yield products that prioritize marketing appeal and products built on sustainable risk management will widen dramatically. Financial institutions that pursue total yield without understanding their potential exposure may find themselves explaining significant losses to stakeholders who thought they were investing in a conservative income product.
Institutional investor yield framework
The phrase “all yields are not created equal” should become the way institutions evaluate the income opportunities of digital assets. Yields without transparency are nothing more than speculation. Unregulated yield represents unmitigated risk exposure. Without proper risk management, yield becomes a liability rather than an asset.
Accurate institutional-grade yields require a combination of regulatory compliance, operational transparency, and sophisticated risk management, and these capabilities remain lacking.
The crypto yield space is currently experiencing this transition, accelerated by frameworks like MiCA that provide clear standards for institutional-level services.
Regulatory calculations
As MiCA takes effect across Europe, the crypto yield industry faces regulatory liquidation that distinguishes between compliant providers and those operating in a regulatory gray zone. European institutions will increasingly demand services that meet these new standards, creating market pressures for appropriate licensing, transparent risk disclosure, and institutional-level operational practices.
This regulatory clarity could accelerate consolidation in the revenue space, as providers without the appropriate infrastructure will struggle to meet institutional requirements. The winners will be those that invest early in compliance, risk management, and operational transparency, rather than those that focus primarily on attractive APY marketing.
evolution of nature
Digital assets are entering a new phase of institutional adoption. Power generation needs to evolve accordingly. The choice facing financial institutions is not between high or low APYs, but between providers that offer sustainable, compliant revenue and those that prioritize marketing over content.
This evolution towards institutional standards in crypto yields is inevitable and necessary. As the space matures, the surviving providers will understand that in the world of sophisticated institutional investors, not all yield is created equal, nor are the providers creating it equal.
Demand for yield will continue to grow as cryptocurrencies become more deeply integrated into institutional investor portfolios. The future belongs to a specific type of provider. We offer yields that are built on risk management principles that are attractive, defensible, compliant and transparent. The market is splitting along these lines. The impact will reshape the entire cryptocurrency yield landscape.
Commenter: James Harris, Tesseract Group CEO.
This article is for general informational purposes only and is not intended to be, and should not be taken as, legal or investment advice. The views, ideas, and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.