The GENIUS Act gave stablecoins a clear legal path in July 2025. But it left regulators with four tough questions to answer. Solve them right, and stablecoins could become a trusted way to pay. Solve them wrong, and the fast-growing market could rattle the banking system.
The rapid expansion of activity underscores the urgency for regulators to finalize these rules. Without clear guidelines, the market's growth could outpace oversight, creating systemic risks.
The GENIUS Act aims to position payment stablecoins as a means of payment rather than a speculative investment. Financial institutions, particularly smaller community banks, fear that if stablecoin issuers can pay interest, it may pull deposits away from banks and limit their ability to lend. While overall lending may be sustained via alternative avenues, the swift expansion of stablecoins featuring instant, round-the-clock payments and redemptions might increase operational risks and threaten payment system integrity.
Conversely, banning interest or rewards could be easily bypassed. For instance, a stablecoin issuer or a third party might pair the stablecoin with complimentary add-on services. The authors advise initially imposing limits on interest payments to allow sufficient time to evaluate how stablecoin issuance affects payment system integrity. Over time, as the stablecoin regulatory framework demonstrates its reliability, those restrictions might be relaxed.
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The GENIUS Act mandates that stablecoins maintain a minimum 1-to-1 reserve to ensure value stability. Allowed reserves include not just cash and Treasuries but also uninsured bank deposits and repo borrowing, assets that can become risky and hard to liquidate in a crisis. Consequently, capital, liquidity, and risk management rules are essential to guarantee that stablecoins can always be redeemed at par, even in times of market strain or issuer failure.
Stablecoins from issuers unable to guarantee stable value are unlikely to gain traction, since firms can instead use tokenized deposits for many transactions. Tokenized deposits benefit from robust banking oversight, deposit insurance, and lender-of-last-resort support. The authors advocate for stringent prudential rules so that holders can always redeem stablecoins at face value, even if the issuer fails or markets are stressed.
The GENIUS Act specifies that payment stablecoin issuers must comply with the Bank Secrecy Act and implement anti-money laundering and counter-financing of terrorism (AML/CFT) programs. Stablecoins demand stricter AML/CFT measures than tokenized deposits, as they function like digital cash - a bearer instrument that can be transferred without revealing identity. An issuer has limited ability to track or influence who ends up using its stablecoins once they are in circulation.
The authors suggest that regulators explore creating a worldwide registry of approved counterparties for stablecoin transactions, using only essential data for compliance. In a related move, the Federal Reserve has proposed giving payment service providers restricted access to Fed payment accounts, aiming to foster innovation while maintaining payment system safety and efficiency.
Payment stablecoins built on permissionless blockchains face heightened concerns around governance and resilience, especially during failures. Regulators need to address operational dangers including fraud, cyberattacks, and system outages.
The future of stablecoins as a safe and trusted payment instrument depends on the answers.
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