The Genius Act: what needs to be addressed and why should we care?

The Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act) is a freshly passed law that establishes a framework for regulating stablecoins. Stablecoins are digital assets designed to maintain a fixed value, typically pegged to the U.S. dollar. The act requires all stablecoins to be backed one for one by U.S. dollars. This establishes a new standardized framework for determining reserves, conducting audits, and enhancing transparency for investors and consumers. Before the GENIUS Act, stablecoin issuers were not legally required to maintain one for one backing with low-risk assets, which created significant uncertainty and risk in the digital asset market. These assets include U.S. treasury securities, cash, and demand Deposits, as well as central bank reserves. By enforcing this backing requirement, the act aims to ensure that every dollar’s worth of stablecoin in circulation is supported by a redeemable dollar held in reserve. This framework marks a significant step toward dual federal and state oversight, enhancing consumer protection while reinforcing the dominance of the U.S. dollar in the global digital finance sector.

However, the GENIUS Act is not without flaws. One particularly controversial statement appears in Section 4(i)(2), which states: “For the avoidance of doubt, existing Office of Government Ethics laws and the ethics rules of the Senate and the House of Representatives prohibit any member of Congress or senior executive branch official from issuing a payment stablecoin during their time in public service.” While this section is intended to prevent conflicts of interest, it simultaneously raises red flags about interpretation and enforcement. The Senate Banking Committee clarified that elected officials, including President Trump and their families, are not barred from owning or participating in stablecoin ventures. This contradiction creates confusion about the true limits of the law, especially regarding what constitutes a “senior executive.” Courts could interpret this term in various ways, leading to uncertainty about who can legally engage in stablecoin activities while in public service. Although the intent may be ethical transparency, the ambiguous language opens the door to loopholes. Overall, while the GENIUS Act is a major step toward establishing U.S. stablecoin supremacy, it also leaves a few “hairy sections” that require further clarification and revision.

Another major concern with the GENIUS Act is its potential to cause financial instability due to insufficient reserve requirements. According to Congress, “S. 1582 would define payment stablecoin as a digital asset issued for payment or settlement and redeemable at a predetermined fixed amount (e.g., $1). Issuers would be required to hold at least one dollar of permitted reserves for every one dollar of stablecoins issued.” This one-for-one reserve mandate ensures stability under normal circumstances, but it fails to require an additional liquidity buffer. There is some concern that there could be an event where all holders attempt to redeem their stablecoins simultaneously. This would be similar to a “bank run” and the system may not be able to handle the surge in withdrawals. Without extra reserves, this could mirror the liquidity crises seen during the 2008 financial meltdown. Additionally, critics like Americans for Financial Reform (AFR) have noted that the act offers “little protection for consumers from failed stablecoins.” If a stablecoin collapses, holders receive no deposit insurance, and regulators will not take over insolvent issuers to repay customers. Instead, users must endure a long and uncertain bankruptcy process, an outcome that the law only partially addresses through Section 9(a), which grants stablecoin holders “priority over all other claims” in insolvency. Yet even with this priority, full reimbursement is not guaranteed, as Section 4(a) explicitly prohibits any form of government-backed insurance.

We should care deeply about the GENIUS Act because it represents the United States’ first step toward defining the future of crypto regulation. Stablecoins could soon become as common as credit cards or cash, serving as the backbone of global payments. If regulated properly, they can strengthen the U.S. dollar’s global dominance and make transactions faster, cheaper, and more secure. However, if the act’s weaknesses of ambiguous ethics clauses, insufficient reserve requirements, and lack of consumer protection remain unaddressed, the U.S. risks repeating the mistakes of past financial crises in a new digital form. 

Written by Teymour Farman-Farmaian, CEO Higlobe and Aaron Becker, Higlobe Intern.
Higlobe was the first company to move funds internationally at scale using stablecoin.