GENIUS Act Is a Promising Step for Crucial Stablecoin Regulation

The Senate passed the GENIUS Act earlier this month with bipartisan support, marking the most promising legislative effort yet to regulate payment stablecoins in the US.

Stablecoins stand out for their predictability in a crypto universe defined by volatility. Now a $260 billion market, stablecoins support crypto trading, cross-border payments, and decentralized finance. Payment stablecoins such as Tether (USDT) and Circle (USDC) are pegged to the US dollar and promise one-to-one redemption, making them the most intuitive cryptoassets for traditional finance to grasp.

But this promise of stability underscores the urgency of regulation. Stablecoins can be among the most dangerous digital assets without clear rules—precisely because they appear safe, fueling growth without safeguards. The 2022 collapse of Terra/Luna, a poorly designed algorithmic stablecoin, made the risk of stablecoin runs painfully clear. The GENIUS Act signals that much-needed stablecoin regulation is finally underway.

Key Questions

Stablecoin legislation has been years in the making, but the central question remains simple: Who should be allowed to issue them? The answer determines the structure of the stablecoin market as well as which regulators hold jurisdiction.

An early proposal, the STABLE Act of 2020, adopted a strict stance by requiring stablecoin issuers to obtain a banking charter and be subject to federal oversight, which would include regulation as insured depository institutions under the Federal Deposit Insurance Corp. Subsequent efforts, including the TRUST Act of 2022 and the Clarity for Payment Stablecoins Act of 2023, proposed more flexible dual-licensing models allowing issuance by either federally supervised or state-regulated entities.

The GENIUS Act of 2025 establishes a three-tiered licensing structure. Under the Act, stablecoins may be issued by bank subsidiaries regulated by existing supervisors such as the FDIC or the Federal Reserve; federal nonbank issuers approved and supervised by the Office of the Comptroller of the Currency; and state-qualified issuers licensed by state regulators under regimes that meet federally established standards, with backup enforcement authority from the Fed and OCC if issues arise.

This tiered approach has been welcomed by an industry that has organically grown outside the traditional banking system—led by private issuers who were never banks and have shown little interest in becoming them.

Another critical question facing lawmakers is: What backs the tokens? The four proposals show broad agreement on reserve requirements, generally mandating 100% backing in high-quality liquid assets such as cash and short-term US Treasuries. The GENIUS Act goes further by prohibiting the use of reserves for any purpose other than redemptions and granting stablecoin holders priority claims over other creditors in the event of issuer insolvency.

These provisions address past concerns about stablecoin issuers engaging in opaque lending or risky investments using customer funds. It helps ensure that stablecoins are both notionally liquid and reliably redeemable, drawing a clear line between payment stablecoins and more speculative digital assets.

Of course, reserves only matter if they can be verified. This raises a third key question: How often should stablecoin issuers disclose their reserves, and in what form?

The GENIUS Act responds with a strict disclosure mandate. Issuers must publish monthly proof-of-reserve reports, audited by an independent accounting firm and certified by top executives under penalty of law. These measures mirror those imposed on traditional financial institutions, reinforcing that stablecoin issuance isn’t merely a technological function—it’s a fiduciary responsibility.

New Playing Field

Today, the stablecoin market is dominated by USDT and USDC, with USDT holding the lead. Yet USDC may emerge as the regulatory frontrunner. It is often perceived in the US as more transparent than USDT, as Circle Internet Group Inc. regularly publishes reserve attestations conducted by well-known US accounting firms.

With the Act imposing strict reserve and audit requirements, USDC’s regulatory readiness gives it a potential edge. Institutional sentiment appears to reflect this, as Circle’s recent IPO filing has been widely seen as a vote of confidence in its long-term compliance strategy.

The GENIUS Act meanwhile could lower the barriers to entry for new, compliance-ready issuers.

USDT and USDC have enjoyed a first-mover advantage in a space where reputation substituted for regulation. With clear, uniform standards soon in place—governing licensing, reserves, and transparency—the playing field is becoming more accessible. For example, J.P. Morgan Chase & Co. has reportedly filed a trademark for a stablecoin ticker, symbolizing the type of institutional entrants that the GENIUS framework may invite.

Importantly, the GENIUS Act prohibits interest payments on stablecoin holdings (or excludes interest-bearing issuers from its scope), reinforcing its view that dollar-pegged tokens are for payments, not investments.

The absence of a yield race won’t eliminate competition. Like in banking, stablecoin issuers may find creative ways to attract customers, from enhanced custody features to integration with traditional financial services. In a market no longer governed by trust alone, business will be earned by what backs a stablecoin, how it’s delivered, and what it delivers alongside.

Remaining Considerations

While the GENIUS Act represents a milestone in stablecoin regulation, two considerations deserve emphasis.

First, although the Act mandates monthly audited proof-of-reserve reports, the Public Company Accounting Oversight Board has yet to issue standards specific to stablecoin auditing.

Its most substantive public statement remains an Investor Advisory issued in March 2023, which cautions that proof-of-reserve reports aren’t audits, fall outside PCAOB standards, and provide only limited assurance. Recent political discussions about the possible dismantling of the PCAOB further complicate the path toward robust, enforceable stablecoin audit practices.

Second, even fully compliant stablecoins could pose systemic risks.

The Treasury market’s exposure to the stablecoin market could grow rapidly under a clear regulatory framework. A Citigroup report in April predicted that stablecoin issuers could collectively hold $1.6 trillion in US Treasuries by 2030. In the event of crypto market turmoil, mass redemptions could trigger fire sales, disrupt the Treasury market, and ripple through the broader financial system.

As stablecoins become more intertwined with traditional finance, their promise of stability will depend not only on regulatory compliance, but also on the robustness of the audit system and the resilience of the Treasury market itself.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Vivian Fang is the Sznewajs Family Chair in Finance at the Kelley School of Business, Indiana University. She has been teaching and researching cryptocurrencies since 2018.

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