U.S. Legislation Aids Stablecoins, Elevating Market Value beyond $264 Billion
The GENIUS Act, enacted on July 18, 2021, marks a significant milestone in the U.S. financial landscape as it establishes a comprehensive regulatory framework for payment stablecoins. This new law brings clarity to the stablecoin market, reducing legal uncertainty and fostering a more stable environment for growth.
Under the GENIUS Act, only certain entities can issue stablecoins in the U.S. These include federally regulated banks, qualified non-bank entities, and state-regulated issuers that meet strict criteria. Issuers with over $10 billion in stablecoin issuance fall under federal supervision, primarily the Office of the Comptroller of the Currency (OCC), while smaller issuers may be regulated by state authorities, provided their programs receive approval from a new federal Stablecoin Certification Review Committee.
Stablecoins must be backed 1:1 with U.S. dollars or U.S. Treasury securities to ensure strict reserve backing, maintaining full coverage with liquid, high-quality assets. Issuers must publish monthly reserve breakdowns and undergo routine audits. They also have to maintain clear redemption policies allowing holders to redeem stablecoins at par value and demonstrate operational soundness, retaining the technical capability to freeze or burn coins if required by law.
The GENIUS Act enhances consumer protections and operational safeguards, mitigating systemic risks associated with the growth of stablecoins and their integration into the wider financial system. If an issuer goes bankrupt, stablecoin holders receive priority over other creditors such as banks or bondholders, differing from traditional bankruptcy proceedings. Issuers are also prohibited from misrepresenting their stablecoins as legal tender, federally insured, or U.S. government-backed. They cannot use transaction data for targeted advertising without user consent, ensuring consumer privacy protections.
The Act also includes provisions for non-financial public companies needing unanimous approval from the Stablecoin Certification Review Committee (led by the Treasury Secretary) to issue stablecoins. Individuals with certain financial crime convictions are disqualified from serving as officers or directors of stablecoin issuers.
The rapid launch of new stablecoins suggests months of preparation before the GENIUS Act passed. Major banks, including Bank of America, JPMorgan, and Citigroup, are preparing to enter the stablecoin market. Traditional finance players are making their move into the stablecoin market, with Anchorage Digital and WisdomTree being among the first. Anchorage Digital has launched a stablecoin issuance platform in partnership with Ethena Labs, bringing Ethena's USDtb stablecoin under the new GENIUS Act regulatory framework.
However, decentralized stablecoins like DAI face the biggest hurdles as their crypto-backed model doesn't fit the cash and Treasury bill requirements of the GENIUS Act. Circle's USDC, which already has reserves mostly in cash and government debt, appears better positioned but still needs to implement monthly certification requirements. Tether, which controls the largest stablecoin USDT, must overhaul its reserve structure to comply with the new regulations.
The stablecoin market capitalization surged by nearly $4 billion in just seven days following the passage of the GENIUS Act, reaching over $264 billion. The Act aims to enhance market stability and consumer confidence in stablecoins as reliable payment instruments. The dual federal-state regulatory model allows oversight tailored to issuer size and structure, promoting innovation while maintaining robust regulatory standards.
In summary, the GENIUS Act formalizes and tightens stablecoin issuance and oversight in the U.S., seeking to balance innovation with financial stability and consumer protection in this rapidly expanding market.
- With the GENIUS Act, businesses like Anchorage Digital and WisdomTree, traditional finance players, are preparing to issue stablecoins, aligning with the new regulatory framework established by the Act.
- Under the new regulatory system, issuers of stablecoins, such as Circle's USDC and Tether's USDT, will need to modify their reserve structures to comply with the stricter requirements set forth by the GENIUS Act, ensuring greater financial stability and consumer protection.
