GENIUS or Gimmick: Crypto on Capitol Hill

Cover image credit: Stacey Ngiam

Image credit: The Telegraph/Justin Metz

US President Donald Trump once expressed his disdain for cryptocurrency, accusing the ill-regulated digital currency of facilitating unlawful behaviour and describing Bitcoin as a scam. Yet, Trump’s stance took a dramatic turn as he hit the campaign trail in preparation for his second term. In one of the sharpest policy reversals yet, the critic-turned-evangelist promised to make America the crypto capital of the world if elected.  

True to his word, Trump fulfilled many of his campaign promises once in office, cementing his 2nd administration’s reputation as darling of the crypto industry. From replacing crypto hawks with crypto-friendly regulators and ending active investigations into multiple crypto firms to ordering the creation of a strategic national stockpile of digital assets and signing a landmark stablecoin regulatory framework into law, Trump has heralded the transformation of the once-pariah industry into one of the most well-endowed power brokers in Washington.

Clarity in the Digital Assets Space 

Enter the GENIUS Act. As the first piece of legislation that aims to integrate stablecoins into the wider US financial system, the Guiding and Establishing National Innovation for US Stablecoins Act (otherwise known by its acronym, GENIUS) introduces a novel dual federal-state regulatory framework for institutions seeking to issue stablecoins in the US market. Foreign issuers compliant under comparable regimes may also offer stablecoins to US residents. 

Regulated stablecoins refer to fiat-backed digital assets pegged to a fixed monetary value (e.g 1 USD) that are intended for use in payment or settlement. However, endogenously collateralised stablecoins (whose value are derived from the value of another digital asset and typically managed through an algorithm/smart contract) are not regulated under the GENIUS Act. Due to their high-risk nature, the Act also imposes a 2-year moratorium on their issuance in the US. Other forms of cryptocurrencies such as Bitcoin and Ethereum are excluded due to their volatility. 

The federal-state structure allows for different regulators to assume oversight of permitted payment stablecoin issuers (“PPSI”) depending on the total outstanding value of stablecoins issued: the Office of the Comptroller of the Currency (OCC) regulates large issuers with stablecoins in excess of US$10bn while issuers with a smaller market capitalisation may register under various state regulators, such as New York’s BitLicense scheme and Wyoming’s Special Purpose Depository Institution Charter. 

Under the GENIUS Act, non-financial firms including Amazon and Walmart may soon be eligible to issue their own stablecoins. Image credit: Brookings Institution

Notably, the GENIUS Act also provides a pathway for a non-financial public company such as Amazon or Walmart to issue its own payment stablecoin if it obtains unanimous approval from the Stablecoin Certification Review Committee. Composed of representatives from the Treasury, Federal Reserve and Federal Deposit Insurance Corporation (FDIC), approvals will only be granted if the firm’s issuance of payment stablecoins is assessed to pose no systemic risk to the US banking system and complies with relevant data transaction safeguards.   

Moreover, a PPSI is considered a “financial institution” for the purposes of the Bank Secrecy Act (BSA). Alongside all other regulated US financial institutions such as depository institutions and money services businesses, a PPSI must adopt relevant measures in line with federal anti-money laundering/ countering the financing of terrorism (AML/CFT) regulations and comply with sanctions programs. It must also possess the technological capability to seize stablecoins, freeze stablecoin holdings or block transactions upon the reception of lawful orders. 

Consumer Protection

Strict reserve requirements form a core tenet of the GENIUS Act – all PPSIs are expected to hold identifiable reserves in the form of high-quality, liquid assets such as short-term Treasury notes and fiat deposits. Each stablecoin must be backed at a minimum 1:1 ratio by reserves that must be segregated from the PPSI’s own assets and held by a custodian, subject to regular public disclosures and audits. In the event that a PPSI goes under, stablecoin holders are guaranteed priority over the claims of all other creditors during liquidation proceedings. With limited exceptions, the practices of commingling assets and rehypothecation are prohibited. 

Severe financial penalties apply for misleading advertising. A PPSI must disclose all fees imposed in plain language and avoid implying that its payment stablecoin constitutes legal tender or is FDIC insured. Issuers are also banned from paying interest to stablecoin holders, though yield disguised as incentives as part of “rewards programs” offered by third-party affiliates has emerged as an ongoing loophole in the Act. 

A New Era...

The GENIUS Act is poised to transform the banking landscape as it ushers in a new era of regulatory clarity for the issuance of payment stablecoins. Traditional depository institutions are best positioned to capitalise on their structural advantage as they already comply with most regulatory requirements. In response, giants in the payments business including PayPal, Visa and Mastercard have accelerated investment timelines and inked new partnerships in the blockchain space, each eager for a slice of the stablecoin pie. 

However, gains are expected to be uneven for the rest of the banking sector, particularly for smaller members such as community banks and regional credit unions. Without a safety net numbering in the hundreds of millions of dollars, the danger of deposit disintermediation is especially severe for these deposit institutions that primarily serve local communities. As their balance sheet consists of deposits that are subsequently loaned out to community borrowers, savers that move savings into digital assets will directly impact the amount of credit that these small banks have available for loan. 

Or A Return to "Free Banking"?

A brief rewind back in time – 19th-century America’s monetary system bore an uncanny resemblance to the one proposed by the GENIUS Act. Characterised by a marked distrust of concentrated financial power in the hands of elites, just about anyone with sufficient capital could establish a bank and issue their own banknotes in the Free Banking era. Banks in states with comparatively lax regulation routinely fell victim to bank runs in episodes of mass panic while chaos ensued as bank notes traded at different prices on secondary markets, with price premiums or discounts dependent on the creditworthiness of the issuer. 

In the same vein, a similar scenario could very well emerge under the GENIUS Act. Expecting regulators to exercise stringent supervision over the dozens of new stablecoin issuers, many of them likely tech and crypto startups with little experience in the banking sector, is almost certainly a pipe dream. In the meantime, markets would price in the risk of these new stablecoins, resulting in a plethora of stablecoins with fluctuating values on secondary markets. 

The separation of banking and commerce has long protected the U.S. financial system from conflicts of interest and excessive concentration of economic power..allowing nonfinancial companies to issue payment stablecoins would dismantle this barrier" ~American Banking Association

Even well-capitalised stablecoins are not infallible to bank runs either. In the March 2023 banking crisis, Circle’s USDC stablecoin, designed to be pegged at US$1, crashed to a low of US$0.87 on secondary markets (where the bulk of investors transact) upon revealing that around 8% of its reserves were held at the failed Silicon Valley Bank (SVB). Eventually, the Federal Reserve was forced to step in and bail out SVB customers whose deposits exceeded the FDIC insurance threshold. 

Image credit: NanoStockk / Getty Images

After the storm settled, losses of US$16bn were eventually borne by major banks through a series of special assessments. In the interconnected economy today, it is inevitable that the failure of a major stablecoin issuer would trigger consequences far beyond the crypto industry. Till date, there remain few banks willing to act as custodian for the reserves stablecoin issuers owing to the significant operational risks involved. 

More concerningly, par-value exchange, the core feature of stablecoins, may not always be possible for the bulk of investors during times of abnormal sell pressure (e.g market downturns). Apart from the few institutional arbitrageurs who are able to mint and redeem stablecoins directly with issuers on demand at par, most coin holders do through the secondary market, transacting via an open-market crypto exchange. Therein lies the issue: researchers from the University of Chicago found in a 2025 paper that par-value exchange does not always hold true as persistent price deviations were observed in secondary markets even during normal times. 

Returning to our previous example of the SVB run, analysis of on-chain data revealed that Circle (the issuer of USDC) was able to process at least US$2bn of redemptions during the crisis, presumably for institutional clients, even as the secondary price peg collapsed. This price discrepancy highlights a fundamental flaw with the market structure of stablecoins that the GENIUS Act fails to address. 

Worse still, sudden large-volume sales of Treasury securities can cause their prices to collapse. If pro-crypto Treasury Secretary Scott Bessent’s predictions of stablecoin issuers holding US$2trn of securities came true one day, truly catastrophic consequences would ensue in the event of a panic sale as the resultant spike in interest rates would reverberate across all other financial markets. 

Crypto enthusiasts on Capitol Hill have certainly had their day in 2025, but it is telling that the “Crypto Week” has not gone as planned. Stablecoins may have niche use cases as a bypass for notoriously high cross-border fees and an alternative storage of value when the native currency undergoes periods of rampant inflation, yet opening the floodgates to stablecoins today introduces an unjustifiable risk to the US banking system. With only one of the trifecta of bills voted on and signed into law (and much of its technical provisions still up in the air), it is evident that appetite for digital assets can only go so far. 

References

1. American Banking Association. (2025, August 12). Joint ABA and State Bankers Associations Letter Regarding Market Structure Recommendations. Aba.com. https://www.aba.com/advocacy/policy-analysis/joint-aba-and-state-associations-letter-regarding-gaps-in-genius-act

2. Congress.gov. (2025). S.1582 - 119th Congress (2025-2026): GENIUS Act. Congress.gov. https://www.congress.gov/bill/119th-congress/senate-bill/1582

3. Eichengreen, B. (2025a, June 17). Opinion | The Genius Act Will Bring Economic Chaos. The New York Times. https://www.nytimes.com/2025/06/17/opinion/genius-act-stablecoin-crypto.html

4. Eichengreen, B. (2025b, June 18). Op-Ed: The Genius Act Will Bring Economic Chaos. Letters & Science. https://ls.berkeley.edu/news/op-ed-genius-act-will-bring-economic-chaos

5. Engoren, D. (2025, July 21). The GENIUS Act: A Framework for U.S. Stablecoin Issuance. Sidley Austin LLP. https://www.sidley.com/en/insights/newsupdates/2025/07/the-genius-act-a-framework-for-us-stablecoin-issuance

6. Goldman, Z., Smith, T. J., Kulkin, M. B., Moorehouse, J., Wieand, J., LaMagna, D., & Gardiner, B. (2025, July 18). What the GENIUS Act Means for Payment Stablecoin Issuers, Banks, and Custodians. Wilmerhale.com. https://www.wilmerhale.com/en/insights/client-alerts/20250718-what-the-genius-act-means-for-payment-stablecoin-issuers-banks-and-custodians

7. Gratton, P. (2025). Experts Say the Widespread Adoption of Stablecoin Can Lead to “Significant Run Risk” in a Crisis. Investopedia. https://www.investopedia.com/hidden-risks-of-widespread-adoption-of-stablecoin-11747043

8. Hand, D. (2025, June 18). Senate OKs GENIUS Act without safeguards needed to protect consumers and the financial system from stablecoin risks. CR Advocacy. https://advocacy.consumerreports.org/press_release/senate-oks-genius-act-without-safeguards-needed-to-protect-consumers-and-the-financial-system-from-stablecoin-risks/

9. Independent Community Bankers of America. (2025). ICBA Summary of the GENIUS Act. ICBA. https://www.icba.org/advocacy/articles/ICBA-summary-of-the-genius-act

10. Infante, S., Kim, K., Orlik, A., Silva, A. F., & Tetlow, R. (2023). Retail Central Bank Digital Currencies: Implications for Banking and Financial Stability. Finance and Economics Discussion Series, 2023-072, 1–34. https://doi.org/10.17016/feds.2023.072

11. Krause, D. (2025, November 10). The GENIUS Act’s Regulatory Bifurcation: Legal Implications. Oxford Law Blogs. https://blogs.law.ox.ac.uk/oblb/blog-post/2025/11/genius-acts-regulatory-bifurcation-legal-implications-bitcoin-and

12. Liang, N. (2025, October 21). Stablecoins: Issues for regulators as they implement GENIUS Act. Brookings. https://www.brookings.edu/articles/stablecoins-issues-for-regulators-as-they-implement-genius-act/

13. Liao, G. Y., & Caramichael, J. (2022). Stablecoins: Growth Potential and Impact on Banking. International Finance Discussion Paper, 2022(1334), 1–26. https://doi.org/10.17016/ifdp.2022.1334

14. Ma, Y., Zeng, Y., & Zhang, A. L. (2025, June 18). Stablecoin Runs and the Centralization of Arbitrage. University of Chicago Becker Friedman Institute. https://bfi.uchicago.edu/insights/stablecoin-runs-and-the-centralization-of-arbitrage/

15. Samuel, A., Aronoff, D., & Narula, N. (2025, July 16). 1:1 Redemptions for Some, Not All - Investigating how stablecoin redemptions rely on access, solvency, and timing. MIT Digital Currency Initiative. https://www.dci.mit.edu/posts/stablecoin-redemptions-for-some-not-all

16. Samuel, A., Jin, J., Aronoff, D., Brownworth, A., & Narula, N. (2025, August 4). Stablecoins and the Limits of Existing Analogies. MIT Digital Currency Initiative. https://www.dci.mit.edu/posts/stablecoin-analogies

17. The White House. (2025, July 18). Fact Sheet: President Donald J. Trump Signs GENIUS Act into Law. The White House. https://www.whitehouse.gov/fact-sheets/2025/07/fact-sheet-president-donald-j-trump-signs-genius-act-into-law/

18. Willems, A. (2025, September 3). The Loophole Turning Stablecoins Into a Trillion-Dollar Fight. WIRED. https://www.wired.com/story/genius-act-loophole-stablecoins-banks/