A Stroke of Genius? Regulation Comes Full Circle

Last week the Genius Act, a bill creating a regulatory framework for stablecoins, passed the Senate by a 68-30 vote- a remarkable level of bipartisanship in this day and age. The legislation was enthusiastically received by banking as well as crypto groups- the latter reaction perhaps shocking to those who recall the crypto community’s mindset as recently as early 2024.

First, let’s be clear- the Genius Act has yet to become law. It must now pass the House, which has been considering a related STABLE Act with a few wonky differences. President Trump has urged the House to quickly approve the Genius version so it can proceed to his desk. Such an outcome seems likely, but minor detours would hardly be surprising.

Both bills aim to create regulatory clarity for stablecoins, enabling mainstream financial services firms to participate in the sector without fear of running afoul of compliance obligations. With subtle variations, both pieces of legislation would accomplish the following:

• Establish clear dollar-for-dollar reserve requirements, in the form of US currency, Treasuries with maturities of 93 days or less, and certain bank and/or Federal Reserve deposits
• Assign regulatory oversight bodies at the state and federal level
• Codify that stablecoins do not qualify as securities, exempting them from SEC regulation
• Establish reporting and other compliance requirements, including for BSA/AML
• Require clear disclosures that stablecoins are not FDIC insured and are not legal tender
• Prohibit the payment of interest on stablecoin holdings

Headlines including “Crypto goes corporate” and “Big banks get a leg up” greeted Genius’ passage. We’ll come back to the first, but it’s worth noting that America’s Credit Unions applauded the Senate vote and encouraged the House to follow suit. ACU’s enthusiasm stems in part from its success in beating back attempts to attach the Credit Card Competition Act as an amendment, but CEO Jim Nussle also celebrated credit unions’ newfound ability to participate in this “digital era of currency.”   

By several measures big banks may indeed have a leg up- through a combination of first-mover advantage, huge R&D budgets and deep rosters of the business clients likely to be the first to benefit from digital currency capabilities. As always, however, CUs have the power of collaboration on their side- not to mention innovators like Bank Social and Metallicus laying the groundwork. 

The ban on stablecoin interest is particularly interesting, and illustrates the spped at which players will pursue workarounds. This provision was prompted by a concern that interest-bearing stablecoins could drain traditional bank deposits, impeding the time-tested virtuous cycle that fuels Main Street lending. JPMorgan Chase has announced plans to launch “tokenized deposits,” which skirt the definition of stablecoins and therefore can pay interest. JPM is already touting its innovation as superior to stablecoin. 

The legislation also opens the door to nonbank participation. Amazon and Walmart, among others, are reportedly exploring internal use of stablecoins; it’s not hard to envision such initiatives expanding in scope. Both bills are notably silent regarding Fed window access for regulated nonbank issuers, but the general principle nonetheless further blurs the boundaries of financial services. Bookmark this as a potential topic for Genius 2.0.

The biggest surprise is the welcoming embrace that’s greeted the prospect of regulation. It’s less shocking from the already heavily regulated “trad-fi” world, which is equipped to navigate such guardrails and craved clarity to keep pace in this critical competitive arena. Recall the extent to which the crypto community thumbed its nose at trad-fi world in the early days, however; the entire point was to reimagine a monetary system not beholden to central banks and entrenched financial powers.

A contingent of players has long aimed to apply crypto’s potential to the mainstream (see USDC and Circle, which is enjoying quite a moment of validation). This is probably a good time to remind that Bitcoin and stablecoin are very different- this legislation does nothing to alter the landscape for Bitcoin or altcoins.

Still, the complete absence of dissenting voices among the early true believers looking to create a new libertarian system rather than link arms with an existing regulated one is stunning. Money changes everything.