What The GENIUS Act Could Mean For Stablecoins, Investors And Taxpayers

The GENIUS Act is a proposed bill that regulates one type of cryptocurrency called stablecoins, a $200 billion part of the multi-trillion-dollar cryptocurrency system. The bill’s name stands for Guiding and Establishing National Innovation for U.S. Stablecoins, and its goal is to create a regulatory framework for stablecoins that could allow them to be more widely used in everyday transactions.

But critics say that the bill as written does an end run around existing bankruptcy law, setting the stage for an eventual massive bailout of the cryptocurrency sector, the key proponents of the bill.

How stablecoins like Tether and USD Coin work

Stablecoins are a type of cryptocurrency whose value is tied to another currency, most often the U.S. Dollar. Unlike most cryptocurrencies such as Bitcoin that fluctuate wildly, a stablecoin is intended to maintain a fixed value to a real target currency. So, it may function much like a digital dollar or a digital euro, holding its value at that fixed price over time.

For example, the most popular stablecoin is Tether, and it can be purchased and sold for $1 at any time, day or night. Tether is actually the third largest crypto coin by market capitalization after Bitcoin and Ethereum.

Stablecoins act like a reserve currency in the crypto world, and they help speed transactions rather than trades needing to work through the slower process of a traditional cash deposit. When traders sell other cryptos, they typically receive the proceeds as a stablecoin, often Tether. When they’re ready to buy a crypto coin, they can pay with their stablecoins, and stablecoins offer a fixed reference price when traders go to make a trade, so they know exactly what they’re paying. Stablecoins such as Tether act as a fundamental medium of exchange for crypto.

To maintain the value of stablecoins, crypto issuers must hold reserves that back up the valuation. But stablecoins typically don’t have $1 cash sitting in a bank for every $1 stablecoin they’ve issued.

For example, Tether holds a collection of fairly liquid assets such as U.S. Treasurys but also alternative assets such as Bitcoin and gold. Importantly, only a tiny amount of a stablecoin’s reserves may be held as actual cash, as opposed to bonds and other assets.

How the GENIUS Act impacts stablecoins

The GENIUS Act is promoted by the cryptocurrency industry, and the act’s goal is to make crypto safe and accessible for daily transactions and to give people confidence to use it.

Right now, cryptocurrency is virtually useless as currency since almost no retailers accept it in payment. So, the act focuses on some measures that maintain the value of stablecoins and otherwise attempt to make the entire stablecoin system, um … actually stable and less risky. That’s key because if a stablecoin can’t maintain its peg to a real currency, then it’s apt to blow up, as happened with the stablecoin TerraUSD in 2022.

And that’s where the GENIUS Act comes in, which — if enacted — would do the following:

• Limits the issuance of stablecoins to permitted parties.
• Establishes reserve requirements for the issuer’s coins, including segregation of reserves, monthly certification and minimum capital standards.
• Establishes anti-money laundering and anti-terrorism procedures for coin issuers.
• Gives regulatory authority to existing federal organizations, including the Federal Reserve, the OCC and the FDIC.
• Gives stablecoin owners a higher priority in a custodian’s or issuer’s bankruptcy.

The net effect, crypto proponents hope, is that it gives users and issuers greater confidence and clarity in how the entire stablecoin system functions, making the coins easier and safer to use.

A clearer framework for stablecoins may let banks and other companies decide to issue their own cryptocurrencies, if it makes sense for them. For example, Bank of America has been developing a dollar-pegged stablecoin, though any launch depends on demand and a host of other factors. Large retailers such as Walmart and Amazon may decide to issue stablecoins, too.

A clearer regulatory framework might allow consumers and businesses to use crypto with greater confidence, though it’s not clear why they might want to switch from current methods. That’s because, even with the GENIUS Act, users of stablecoins still run some serious risks.

How the GENIUS Act could pave the way for a future crypto bailout

Critics of the plan note that the GENIUS Act tries to upend well-established bankruptcy law, setting the stage for a public bailout of the sector. While the GENIUS Act appears to make it safe to use cryptocurrencies, those who do so will continue to bear significant risks, particularly custodial risk and an issuer’s potential bankruptcy. The act’s framework all but guarantees that when a stablecoin blows up that taxpayers will be on the hook to make whole a coin’s owners.

One of the key issues here is custodial risk, an issue that crypto traders should be well familiar with from 2022 and 2023, given the multiple blow-ups and frauds that bedeviled the sector then.

If a coin’s custodian goes bankrupt or has been hacked or ripped off, as Coinbase was recently, there’s no guarantee that clients can get their money back out again. If a custodian goes bankrupt, as exchange FTX did, it may not provide immediate access to your coins. You’ll be an unsecured creditor of the custodian, says Adam Levitin, professor of law, Georgetown University.

Besides the risks of who has custody of your coins, crypto owners also run risks from the coin’s issuer, and here’s where the GENIUS Act tries to rewrite existing bankruptcy laws, says Levitin. He says the act gives stablecoin holders priority in a bankruptcy over the administrative claims such as lawyers and other professionals involved in resolving the bankruptcy, among others. But lawyers and others will not perform their work if they aren’t sure they’ll be paid, he says.

The order of priority is vital, since a stablecoin that has lost its peg likely doesn’t have the assets to make all parties whole, but especially those who own the coins. The limited change in bankruptcy priority in the GENIUS Act is not sufficient to protect a coin’s owners, and even more protections would complicate an orderly wind down of a bankrupt coin issuer, says Levitin.

So the GENIUS Act does not sufficiently mitigate the risks in privately issued stablecoins, according to Levitin. The GENIUS Act promises “safety for stablecoin investors at no cost, but because it cannot deliver on that promise, it sets up a situation where the government has to deliver safety otherwise, on its own dime. In other words, it sets up a bailout.”

It’s a warning to those who see stablecoins as safe and risk-free, especially when government regulations purport to make them so. And it sets up a situation in which the crypto industry – which donated heavily in the 2024 election cycle – is primed for a bailout when things go wrong.

Bottom line

Those who trade cryptocurrency or use it in any form need to be aware of risks that continue to haunt the sector, and which are not fixed by the GENIUS Act. While stablecoins might appear to be safer than traditional cryptocurrencies, they have significant risks that won’t go away soon.