Opinion by: James Harris, group CEO of Tesseract
In a landscape of shrinking margins and increased competition, achieving yield is now an essential requirement.
This gold rush mentality masks a crucial reality shaping the sector’s future: not all yield holds the same value. The market’s fixation on striking returns can lead institutions toward severe losses.
On the surface, the sector appears filled with possibilities. Protocols promote double-digit returns, centralized platforms offer straightforward “yield” products, and marketplaces guarantee quick access to borrowers.
Such disclosures are not just optional details for serious institutions; they are critical elements that distinguish fiduciary responsibility from unacceptable risk.
MiCA reveals the industry’s regulatory void
Europe’s Markets in Crypto-Assets (MiCA) framework has initiated a fundamental shift. For the first time, firms dealing in digital assets can gain authorization to offer portfolio management and yield services, including decentralized finance strategies, within the EU’s single market.
This regulatory clarity is significant as MiCA is more than a mere compliance checkbox; it serves as the baseline that institutions will seek. However, the majority of yield providers in the crypto sector operate without oversight, leaving institutions vulnerable to costly regulatory voids.
The hidden costs of “set it and forget it”
The core issue with many crypto yield products lies in their risk management approach. Most self-service platforms offload important decisions onto clients who often lack the necessary expertise to fully understand their risks. These platforms assume treasuries and investors will select which counterparties to lend to, which pools to invest in, or which strategies to trust—an overwhelming task when boards, risk committees, and regulators expect clear answers regarding asset custody, counterparty exposure, and risk management.
This model fosters a deceptive sense of simplicity. Beneath user-friendly interfaces and enticing annual percentage yield (APY) figures lie intricate networks of smart contract risk, counterparty credit exposure, and liquidity limitations that many institutions cannot adequately evaluate. Consequently, many institutions inadvertently assume risks that would be deemed unacceptable under conventional risk management frameworks.
A comprehensive risk management approach, thorough counterparty vetting, and institutional-level reporting necessitate substantial operational infrastructure that many yield providers lack. This disparity between market demand and operational capability explains why numerous crypto yield products fail to align with institutional standards despite aggressive marketing claims.
The APY illusion
One of the most perilous misconceptions is that a higher advertised APY inherently signifies a superior product. Numerous providers exploit this tendency, promoting double-digit returns that seem more appealing than conservative options. These headline figures nearly always obscure concealed layers of risk.
Related: Bringing Asia’s institutional yields to the onchain world
Behind attractive rates often lie vulnerabilities to unreliable decentralized finance (DeFi) protocols, smart contracts that haven’t withstood market pressure, token-based incentives that might vanish suddenly, and significant embedded leverage. These are concrete risks; they represent the very elements that caused considerable losses in prior market cycles. Such undisclosed risks are unacceptable for institutions responsible to boards, regulators, and shareholders.
The market ramifications of this APY-centric approach are becoming increasingly evident. With institutional adoption accelerating, the divide between yield products that prioritize marketing appeal and those grounded in sustainable risk management will expand significantly. Institutions that pursue headline yields without comprehending underlying exposures may find themselves justifying substantial losses to stakeholders who believed they were investing in conservative income products.
A framework for institutional yield
The phrase “not all yield is created equal” should guide institutions in assessing digital asset income opportunities. Yield devoid of transparency amounts to speculation. Yield without regulation signifies unmitigated risk exposure. Yield without appropriate risk management transforms into a liability rather than an asset.
Reliable institutional-grade yield demands a blend of regulatory compliance, operational transparency, and advanced risk management—capabilities that remain scarce.
The crypto yield sector is currently navigating this transformation, expedited by frameworks like MiCA that establish clear standards for institutional-grade services.
The regulatory reckoning
As MiCA is implemented across Europe, the crypto yield sector faces a regulatory reckoning that will distinguish compliant providers from those operating in regulatory gray areas. Institutions in Europe will increasingly require services that conform to these new standards, creating market pressure for appropriate licensing, transparent risk disclosures, and institutional-grade operational practices.
This regulatory clarity will likely speed up consolidation in the yield sector, as providers without the necessary infrastructure struggle to fulfill institutional demands. The successful players will be those who prioritized compliance, risk management, and operational transparency early on—not those who concentrated primarily on enticing APY marketing.
The natural evolution
Digital assets are entering a new era of institutional adoption. Yield generation must evolve correspondingly. The decision facing institutions is no longer merely between high and low APY but rather between those providers who offer sustainable, compliant yield and those who prioritize marketing rather than substance.
This evolution toward institutional standards in crypto yield is both inevitable and critical. As the sector matures, enduring providers will recognize that in a landscape of discerning institutional investors, not all yield carries the same weight, nor do the providers who generate it.
The demand for yield will persist as crypto becomes more integrated into institutional portfolios. The future favors a specific type of provider: those offering yield that is appealing, defensible, compliant, and rooted in transparent risk management principles. The market is diverging along these lines, and the implications will transform the entire crypto yield landscape.
Opinion by: James Harris, group CEO of Tesseract.
This article serves general informational purposes and should not be considered as legal or investment advice. The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
