Stablecoin Regulation Passes, But Key Gaps Leave Systemic Risks Unaddressed
The GENIUS Act, officially known as the Guiding and Establishing National Innovation for U.S. Stablecoins Act, has been enacted to regulate stablecoins at the federal level, marking a pivotal shift in the oversight of digital assets in the United States. This legislation introduces a framework for issuing and managing payment stablecoins—digital assets intended for use as a medium of exchange or settlement—by setting clear eligibility criteria for issuers and outlining key operational requirements. The Act represents a comprehensive approach, drawing from prior regulatory efforts in the U.S. and abroad, including New York DFS guidance and the EU’s MiCA regime. However, it also leaves several critical questions unresolved, particularly regarding redemption mechanisms, technical standards, and the scope of regulatory responsibilities.
Under the GENIUS Act, only entities classified as permitted stablecoin issuers may issue stablecoins within the U.S. These include subsidiaries of insured depository institutions, federal or state-qualified issuers, and certain foreign entities granted approval by the Secretary of the Treasury. Non-compliant issuers, particularly those operating from outside the U.S., are effectively excluded unless they meet specific criteria. The Act allows for flexibility by permitting smaller issuers to opt for state-level regulation if the regulatory framework is substantially aligned with federal standards. This approach aims to balance innovation with oversight while preventing a fragmented landscape of regulatory compliance.
A key feature of the Act is its emphasis on the redemption process. Issuers are required to establish clear redemption policies and procedures, ensuring timely redemptions for stablecoin holders. However, the Act does not mandate that stablecoins maintain par value in the secondary market, where most transactions occur. This omission raises concerns, as research has shown that stablecoins can trade at persistent deviations from their face value in secondary markets. Without addressing this gap, the Act may fail to prevent systemic risks associated with redemption instability, particularly in times of market stress. Additionally, the lack of clarity on how redemption obligations are fulfilled when the issuer is in financial distress could undermine user confidence.
Interoperability and monetary interchangeability also remain underdeveloped in the legislation. While the Act mentions that regulators may establish interoperability standards, it does not define what such standards entail. This has significant implications for the broader digital dollar ecosystem. Without clear technical and monetary interoperability guidelines, stablecoins could operate in isolated silos, limiting their utility and creating friction in cross-chain transactions. The Bank for International Settlements has warned that a lack of interoperability could lead to a fragmented digital dollar landscape, affecting liquidity and user experience. Furthermore, the absence of requirements for monetary interchangeability—ensuring that all USD-backed stablecoins are exchangeable at par—leaves room for a potentially unstable and uneven payment system.
The Act also sidesteps critical technical considerations such as smart contract security and infrastructure audits. Stablecoins are built on software protocols that govern issuance, redemption, and transfers, yet the Act does not require technical audits or open-source transparency for these systems. This lack of enforceable standards increases the risk of technical vulnerabilities, especially given the frequency of attacks targeting crypto infrastructure. Without minimum risk standards for smart contracts and integrations, stablecoins compliant with the GENIUS Act could still be exposed to exploitation. Moreover, the Act does not clarify liability in the event of technical failures, leaving uncertainty about who would be held accountable for redemptions or enforcement.
Finally, the Act’s restrictions on yield-bearing stablecoins and its potential implications for monetary policy have sparked debate. By prohibiting stablecoin issuers from offering interest to holders, the legislation effectively redirects profits to the issuers rather than the users. This restriction may serve as a protective measure for traditional banking institutions but could also limit innovation and competition in the digital asset space. The Federal Reserve previously studied the potential impact of stablecoins on deposit flows and found that reserves are generally recycled through bank portfolios. However, the broader effects on the money supply and monetary policy remain uncertain. As stablecoins increase the overall M2 money supply, they may also influence inflation and monetary policy transmission, raising new challenges for central banks.
These unresolved issues highlight the need for further regulatory clarification and implementation by agencies such as the Federal Reserve, Treasury, and Financial Crimes Enforcement Network. The GENIUS Act is a foundational step toward integrating stablecoins into the regulated financial system, but its long-term success will depend on how regulators interpret and enforce its provisions.
