The stablecoin law known as the GENIUS Act was portrayed by the White House as a step toward “mak[ing] America the undisputed leader in digital assets, bringing massive investment and innovation to our country.” The Trump administration was delivering on its “promise to make the United States the ‘crypto capital of the world’” and to secure “crypto superpower” status, declared Treasury Secretary Scott Bessent.
That July milestone legitimized and stimulated both crypto-native and traditional finance organizations’ stablecoin initiatives. Yet the “clear rules of the road” celebrated by Bessent in the Washington Post were not the endgame. Higher-stakes digital-asset market structure legislation remains pending, while issues ranging from liquidity and run risks to perceived GENIUS Act flaws to geopolitical “dollar dominance” implications come into focus.
The act itself acknowledged some unfinished business. It required the Treasury Department to request public feedback, in a comment period through October 17, “on innovative or novel methods, techniques or strategies that regulated financial institutions use, or could potentially use, to detect illicit activity involving digital assets. In particular, Treasury asks commenters about application program interfaces, artificial intelligence, digital identity verification, and use of blockchain technology and monitoring.”
As alternatives to conventional money – their value pegged predominantly to the U.S. dollar, continuously available and settled on blockchains – stablecoins were on regulators’ and central bankers’ radar well before the newfound flurry of activity (see The Stablecoin Breakout). At a total market capitalization approaching $300 billion, stablecoins are but a fraction of the aggregate $4 trillion in cryptocurrencies. The latter figure, over 50% of it bitcoin, had already gotten policymakers’ attention as a systemic-risk factor with potential real-economy spillovers.
A July bulletin published by the Bank for International Settlements, “the central banks’ central bank,” posited that “stablecoins’ rising market capitalization and increasing interconnections with the traditional financial system have reached a stage where potential spillovers to that system can no longer be ruled out.”
The BIS authors cited stablecoins’ use in illicit activities, and the need for anti-money laundering and know-your-customer measures, among policy challenges “ranging from preserving financial integrity to mitigating financial stability risks.” Other “key takeaways” included concerns about monetary sovereignty and possible erosion of foreign exchange regulations’ effectiveness; and that “same risks, same regulation” principles may not hold, “highlighting the need for tailored regulatory approaches that address the nature and specific features of stablecoins.”
The dollar-backed Tether USDT (in green) and Circle USDC (in blue) comprise the vast majority of the stablecoin market. Source: rwa.xyz.
The GENIUS Act, signed by President Donald Trump on July 18 and magnified in short order by a President’s Working Group report and “roadmap”, symbolized a sea change from the prior administration’s more hesitant embrace of cryptocurrencies and digital assets. Trump’s election, accompanied by Republican majorities in Congress, swept out Democratic appointees like Gary Gensler, the Securities and Exchange Commission chair whom the crypto community vilified for taking a hard, “regulation-by-enforcement” line on their activities.
Trump, a onetime crypto skeptic, turned into a cheerleader, attracting political support and campaign contributions from the burgeoning sector. The Trump name is attached to, or family members are involved in, meme coins, bitcoin mining, and World Liberty Financial, which offers the USD1 stablecoin.
Gensler’s avowedly crypto-receptive successor, Paul S. Atkins, repeatedly proclaims, “It is a new day at the SEC.” Squabbles over whether the novel products belong in the SEC’s or the Commodity Futures Trading Commission’s purview are giving way to a consensus that is expected to be codified in the market structure legislation.
Announcing a joint “regulatory harmonization” roundtable to be held on September 29, Atkins and his CFTC counterpart, Acting Chairman Caroline D. Pham, stated: “It is a new day at the SEC and the CFTC, and today we reaffirm the need to ensure regulation does not stand in the way of progress. By working in lockstep, our two agencies can harness our nation’s unique regulatory structure into a source of strength for market participants, investors, and all Americans.”
As the new administration has settled in, harmony also reigns across the federal banking regulators, which would examine banks’ stablecoin programs.
The Office of the Comptroller of the Currency, which charters and supervises national banks, is turning away from micromanagement, compliance box-checking and risk-intolerance, Jonathan Gould, who was sworn in as Comptroller on July 15, indicated in a statement to the Financial Stability Oversight Council. He is taking “an eyes-wide-open approach to risk management that extends beyond the immediate time horizon and recognizes that the banking system is one part of a dynamic financial whole.”
GENIUS Act implementation “is an important priority for us, and we are acutely focused on the statutory deadlines that Congress has set,” said Gould, stressing that dynamism, economic growth and financial stability are connected.
Vice Chair Bowman: “Potential to disrupt.”
Michelle Bowman, who was appointed to the Federal Reserve Board during Trump’s first term and was elevated in June to vice chair of supervision, told the Wyoming Blockchain Symposium on August 19 that the GENIUS Act “has brought stablecoins to the forefront of many discussions. And they are now positioned to become a fixture in the financial system, with implications and opportunities for the traditional banking system, including the potential to disrupt traditional payment rails. Congress tasked the banking agencies with creating a regulatory framework for stablecoins, and we are working with our colleagues in the other agencies to move forward.”
A day later at the Teton Village, Wyoming, event, Christopher Waller, a Fed governor since 2020 who has been touted as a candidate to succeed Chair Jerome Powell, called stablecoins “the latest example of private sector-led innovation in payments” and the GENIUS Act “an important step for the payment stablecoin market [that] could help stablecoins reach their full potential.”
Waller said “the properties of stablecoins using distributed ledger technology – including 24/7 availability, fast transferability, and their freely circulating nature – could be attractive” for use cases other than their original and more volatility-exposed crypto-trading applications.
“That includes providing a means to access and hold U.S. dollars, particularly in countries with high inflation or without easy or affordable access to dollar cash or banking services,” Waller continued. “In fact, I believe that stablecoins have the potential to maintain and extend the role of the dollar internationally. Stablecoins also have the potential to improve retail and cross-border payments.”
The coexistence of U.S. federal and state regulation – the so-called dual banking system – has been historically contentious, and digital assets invite different interpretations.
The Conference of State Bank Supervisors (CSBS), responding in August to a Senate Banking Committee request for information, raised among other issues Section 16(d) of the GENIUS Act for enabling certain uninsured stablecoin providers “to bypass host-state oversight of traditional money transmission and custody activities.” This was decried as “an unprecedented erosion of long-standing host-state authority to license and supervise traditional financial activities.”
“There is no compelling federal interest to justify this potentially sweeping disregard for state oversight . . . In fact, these provisions would undermine that framework by giving payment stablecoin subsidiaries of uninsured banks broader powers than stablecoin subsidiaries of other entities,” said another letter to Senate Banking Committee leadership from the CSBS, American Bankers Association (ABA) and other signatories. “Removing this provision from the GENIUS Act and preventing its further expansion would better align federal law with the purpose and intent of national stablecoin regulation while preserving foundational safeguards embedded in our dual banking system.”
If reform of the multi-agency and dual-banking status quo is on the table, then Thomas P. Vartanian, executive director of the Financial Technology & Cybersecurity Center, has a proposal: Consolidate the patchwork of some 160 federal and state financial regulators, which has roots dating back to the Great Depression, down to a Federal Financial Security Commission of seven members including the Fed’s vice chair for supervision, Treasury and Commerce Department under secretaries, and industry and state representatives.
Thomas Vartanian: Re-architect regulation.
“We are experiencing so many financial crises because the regulatory system is obsolete,” says Vartanian, a longtime financial industry lawyer and regulator and author of 200 Years of American Financial Panics. “Until it can function on a real-time basis and rely on data provided by state-of-the-art technologies, it will struggle to keep up with financial systems that now move at the speed of light.
“At the same time, it is imprudent to allow unregulated cryptocurrencies to masquerade as money when their highest and best use is financing global crimes on a scale we have never before seen.”
A letter from the ABA and a host of state bankers associations included calls to “strengthen the prohibition on interest payments for payment stablecoins by extending it to brokers, dealers, exchanges, and affiliates of payment stablecoin issuers”; and to “close loopholes in the prohibition on non-financial companies being payment stablecoin issuers.”
“By closing regulatory gaps, preserving the dual banking system, and upholding the longstanding separation between banking and commerce,” the associations said, “Congress can foster responsible innovation while protecting consumers, preserving access to credit, and promoting economic stability.”
Looking ahead to the market structure bill, the Bank Policy Institute asserted on August 12, “It is important that the requirements in the GENIUS Act, now signed into law, prohibiting the payment of interest and yield on stablecoins are not evaded or undermined.”
Stablecoin reward-payers Coinbase and PayPal are undeterred, as reported by Decrypt.
“There is a prohibition by the issuer of stablecoins on paying interest and yield,” Coinbase CEO Brian Armstrong explained in an earnings call. But the crypto exchange operator is “not the issuer,” he went on, and “we don’t pay interest in yield, we pay rewards . . . which are very competitive. We think it’s a differentiated product and it’s a major reason that people come and store their funds with Coinbase.”
Ronit Ghose, head of Future of Finance, Citi Institute, has warned that yield-payers could lure deposits away from more-constrained banks as money market funds did in the 1970s and 1980s.
Vartanian recalls the rise of MMFs as a case study of allowing unregulated financial products “to gain a competitive advantage over those that are regulated” and thereby exacerbating market upheavals. Serving as general counsel of the Federal Home Loan Bank Board and Federal Savings & Loan Insurance Corp. in the early 1980s, Vartanian authorized more than 1,400 receiverships, conservatorships and mergers of failed or failing institutions in the S&L crisis.
Vartanian worries that a comparable shock is brewing in cryptocurrencies “even before considering the impact of stablecoins,” which a U.S. Treasury analysis suggested could make up to $6.6 trillion in bank deposits susceptible to withdrawals, depending on how interest- or yield-bearing policies play out.
What’s more, while dollar-stablecoin issuance may boost demand for Treasury securities as reserves, and draw outflows from sources other than bank deposits, deposit runoffs “also could reduce the supply of loans in the economy,” Stefan A. Jacewitz of the Federal Reserve Bank of Kansas City has written.
A Treasury Department presentation identified transactional deposits as potentially “at risk” due to stablecoin growth (total U.S. deposits, 4Q 2024, in trillions of dollars).
That substitution effect has international fiscal, monetary and stability implications when rising global demand for dollar stablecoins – by far the leading denomination, and largely trading outside the U.S. – is taken into account. In the International Monetary Fund’s Finance & Development Magazine (F&D), London Business School economics professor Hélène Rey writes that demand for non-U.S. government bonds could fall as that for Treasuries grows.
“The magnitude of this effect will depend on substitution patterns between dollar-backed crypto assets and money market funds and deposits in local currencies and dollars,” says the article, which notes that Tether (for the USDT stablecoin) and Circle (USDC) combined hold more U.S. Treasuries than Saudi Arabia. Tether will presumably be purchasing more Treasuries to back its U.S.-domiciled, GENIUS Act-compliant USAT.
Crypto industry players have sought to debunk the $6.6 trillion assumption about outflows and argued that restrictions on non-financial companies and rewards are anticompetitive. In addition, on their wish list is federally mandated “fairness, consistency and uniformity in regulation of the digital-asset market” to prevent any states from perpetuating past regulation-by-enforcement complications, as Coinbase chief legal officer Paul Grewal put it in a comment letter to the Justice Departent.
A broad coalition led by the DeFi Education Fund has united to lobby for protections of software developers and non-custodial service providers from “regulatory categories designed for the traditional, intermediated financial world.” Lacking such safeguards in market-structure legislation “risks stifling innovation, undermining open-source development, and driving blockchain infrastructure development out of the United States.”
To U.S. officials, stablecoins are a technology-forward innovation along the road to more widespread decentralized finance (DeFi) and asset tokenization. They could reinforce the dollar’s primacy as a reserve and international-transaction currency and stoke demand for Treasury securities to finance the government.
Central bankers across the pond – whose currencies trail the dollar’s dominance, stablecoins included – stand at a more critical distance.
The U.S. dollar is the dominant stablecoin denomination (left chart) and even more so in market capitalization (right chart). Source: Bank for International Settlements, Stablecoin Growth - Policy Challenges and Approaches.
While acknowledging in a July Mansion House speech “an urgent need for innovation now in the area of payments,” Bank of England Governor Andrew Bailey said, “There may well be a role for stablecoins going forward, but I don’t see them as a substitute for commercial bank money. Moreover, our job will be to ensure that those stablecoins that purport to be money are safe.
“Perhaps there may also be a role for retail central bank digital currency [CBDC],” Bailey went on, referring to a digital form of fiat money that many countries are exploring but that has been slow-walked if not actively opposed in Washington. The BoE governor said he “remain[s] to be convinced why the natural next step is to create a new form of money rather than put digital technology into retail payments and bank accounts.”
A BoE suggestion to put a cap on ownership of stablecoins by individuals and businesses was roundly denounced.
At the European Central Bank, work is progressing on a digital euro, which President Christine Lagarde has referred to as a “strategic priority” to “help safeguard Europe’s bank-based financial and monetary system,” strengthen its “strategic autonomy [and] ensure an innovative and resilient European retail payments system.”
In those remarks to a European Parliament committee in June, Lagarde also flagged the monetary and financial-stability risks posed by privately issued stablecoins, particularly given inconsistencies in international regulation.
“These assets are not always able to maintain their fixed value,” she noted, “compromising their usefulness as a means of payment and a store of value. Moreover, a potential shift in deposits used for payments and savings – from banks to stablecoins – could adversely affect the transmission of monetary policy through banks. Stablecoins must therefore be governed by sound rules, especially when they operate across international borders.”
China, which is pursuing a digital yuan but has kept a lid on cryptocurrencies, is reportedly assessing whether current stablecoins’ dollar dominance warrants a competitive response.
The GENIUS Act mandates stablecoin audits and reserve backing, as does the EU Markets in Crypto-Assets Regulation (MiCAR). But Lagarde said the lack of a global level playing field “can open the door to new risks and systemic vulnerabilities. We must therefore remain alert to developments in other jurisdictions and advocate for globally aligned regulations for stablecoins.”
Christine Lagarde: “International cooperation is indispensable.”
In a September 3 speech to the European Systemic Risk Board (ESRB), which she chairs, Lagarde contended that a seemingly novel innovation may be “reintroducing old risks through the back door.”
“The most evident is liquidity risk,” she said, which harkens back to the ESRB’s “sounding the alarm on certain types of money market funds” to ensure that they can meet redemption requests and stave off runs. Despite the MiCAR provisions, “gaps remain.” If a stablecoin were jointly issued by an EU and non-EU entity, reserves required by MiCAR may be insufficient to cover total redemption demand.
“We know the dangers. And we do not need to wait for a crisis to prevent them,” Lagarde said. “European legislation should ensure that such schemes cannot operate in the EU unless supported by robust equivalence regimes in other jurisdictions and safeguards relating to the transfer of assets between the EU and non-EU entities. This also highlights why international cooperation is indispensable.”
“The associated risks are obvious – and we must not play them down,” ECB adviser Jürgen Schaaf wrote in a July 28 blog, From Hype to Hazard: What Stablecoins Mean for Europe. “Non-domestic stablecoins’ challenges range from operational resilience, the safety and soundness of payment systems, consumer protection, financial stability, monetary sovereignty, data protection, to compliance with anti-money laundering and counter-terrorism financing regulations.”
Still, “Europe’s stable institutional framework and rules-based approach” could work to the continent’s advantage, engendering trust and strengthening the euro.
The U.S. is not without stablecoin critics and skeptics.
John Reed Stark, a consultant, former Internet Enforcement chief at the SEC, and crypto-asset contrarian, said on National Public Radio, "In most instances, we have no visibility to any stablecoins, no public audits, no examinations, no inspections – who knows what is really going on?”
The GENIUS Act “has given fresh life to a recurring fantasy that technology can finally banish the instability at the heart of finance,” Stanford Graduate School of Business professor and Hoover Institution senior fellow Amit Seru wrote in Can Markets Trust Stablecoins?, a Wall Street Journal commentary. “The promise is beguiling, but the reality is familiar: We can make money modern, but we’re still plumbing it through 19th-century pipes.”
In a New York Times opinion article, Crypto Is a Threat to the U.S. Financial System, Johns Hopkins University professor Henry J. Farrell and co-author Dan Davies questioned a number of claims. Instead of shoring up dollar dominance, for one, stablecoins “are likely instead to undermine it,” the article said, “fostering scams and sanctions evasion, generating financial risk and perhaps even allowing another currency to supplant the dollar in global trade.”
If “legitimating stablecoins will turn an unruly crypto ecosystem . . . into an everyday part of the financial system,” in Farrell and Davies’ view, “all of that would be great for the industry, but it comes with enormous risk for financial stability across the world,” and the possibility that “American financial hegemony would give way to a private-sector free-for-all.”
Arthur Wilmarth, professor emeritus of law, George Washington University Law School, opposed the GENIUS Act, saying its “weak and inadequate regulatory regime for uninsured nonbank stablecoin issuers would set the stage for future runs on stablecoins” that could trigger systemic crises and the need for government bailouts.
Arthur Wilmarth: Beware a bubble.
Allowing Big Tech and other commercial enterprises to own and conduct banking business with stablecoins would undermine the long-standing separation of banking and commerce, “enable stablecoins to become ‘shadow deposits,’ and stablecoin issuers could inflate a ‘Subprime 2.0’ crypto bubble by offering crypto derivatives,” Wilmarth wrote in The Looming Threat of Uninsured Nonbank Stablecoins.
The 2023 failure of Silicon Valley Bank was also a run on Circle’s USDC, Wilmarth pointed out in an Open Banker article. The stablecoin’s $1 peg was knocked down to 87 cents as Circle’s reserves included $3.3 billion of deposits at SVB. “USDC avoided a complete collapse only because the federal government decided to rescue Circle and SVB’s other uninsured depositors. Thus, we’ve already experienced our first government bailout of uninsured nonbank stablecoins.”
Paul Kupiec, a former Federal Deposit Insurance Corp. official, now an American Enterprise Institute senior fellow, raised the question, Who Will Pay for Payment Stablecoin Supervision and Regulation?: “Developing suitable payment stablecoin safety and soundness regulations will be costly. There will be additional set-up costs associated with approving payment stablecoin applications, processing and storing stablecoin issuer regulatory data, and creating procedures and manuals for on-site examinations, supervision and enforcement actions” – “nontrivial” sums not explicitly allocated in legislation.
As Kupiec sees it, “Under the provisions of the GENIUS Act, the payment stablecoin industry gets to pass its regulatory set-up costs on to banks, bank customers and, in the case of the Fed, discreetly but surely on to taxpayers.”
Fintech strategist Nitin Gaur, who has worked on blockchain and digital assets at IBM and State Street Corp. and is DTCC Digital Assets senior advisor, posted on LinkedIn in June: “After nearly 15 years in this space, I’m both thrilled to see this evolution and cautious about the risks that come with it. As stablecoins scale across payment, treasury and settlement rails, it’s critical we address the technological, operational and systemic guardrails required to ensure safe, sustainable adoption.”
Prof. Hélène Rey: “We must brace ourselves . . .”
A month later, upon enactment of GENIUS and with the CLARITY Act coming behind it, Gaur deemed them “not just legislative milestones – they are markers of intent. They represent a long-awaited bridge between innovation and prudence, enabling us to reimagine what financial infrastructure can look like in a digital-native economy.” He leaned toward considering it “a once-in-a-generation inflection point that redefines how value is issued, stored, transmitted, and governed.”
“In a world where stablecoins, particularly those pegged to the dollar, become an important global payment tool, we must brace ourselves for substantial consequences,” says Hélène Rey in the IMF’s F&D magazine. “On the negative side are dollarization and its side effects, financial stability risks, potential hollowing out of the banking system, currency competition and instability, money laundering, fiscal base erosion, privatization of seigniorage, and intense lobbying.
“On the positive side, cross-border payments may be quicker and cheaper, which matters especially for remittances. And citizens of countries with poor governance would have access to more stable and convenient means of payment and store of value than their domestic currency.”
Also in F&D, Yao Zeng, assistant professor of finance and Cynthia and Bennett Golub Faculty Scholar at the University of Pennsylvania’s Wharton School: “The more effectively [stablecoins] maintain stable prices, the more they resemble banks – yet without deposit insurance or a lender of last resort, making them more vulnerable to runs. These observations make one thing clear: Stablecoins may function well in good times, but they can falter under stress.”