The GENIUS Act is Now Law. What’s Missing?
Intro
The recently signed GENIUS Act is the first comprehensive federal effort to regulate stablecoins. It builds on its predecessors both in the US, like the NYDFS Guidance, and abroad, including MiCA and the Singapore MAS guidance. The Act creates a federal framework for issuing and regulating payment stablecoins.
There have been many different summaries of the GENIUS Act in the last month, so we instead examine what the law omits, where it is unclear and what might break later.
Before diving in: although the GENIUS Act is now law, there are still provisions subject to further study and various agencies will still need to determine some facets of the exact implementation. A mosaic of regulatory agencies will interpret the law, issue regulations, and build out a working framework for licensing, supervision, enforcement, and technical standards.
What the GENIUS Act Omits
The GENIUS Act is silent on a few notable matters including redemption mechanics, interoperability, and technical security. We will use this section to explore why these omissions are significant.
Redemption Mechanics
In our previous posts, we talked about redemption risks and how these can create an unfair playing field for institutional vs. retail investors as well as how, left unchecked, they may actually catalyze potential runs on stablecoins.
The GENIUS Act requires issuers to disclose a redemption policy and establish procedures for the timely redemption of stablecoins. It also tasks regulators with establishing standards that ensure stablecoin issuers can meet obligations like redemptions (this is not unusual, e.g., see Sarbanes-Oxley and the Affordable Care Act).
The omission of any reference to maintaining par-value exchange in the secondary market (where most stablecoin users actually transact) is especially concerning, however, in light of recent research (Ma, Zeng, and Zhang) documenting systematic and persistent deviations from par in secondary markets.
Interoperability and Interchangeability
The GENIUS Act mentions that regulators may prescribe interoperability standards for stablecoins, but it does not define what interoperability actually means in practice. As a starting point, interoperability can be broken down into two components:
Network Interoperability: can a stablecoin be used across multiple blockchains, wallets, and platforms without friction?
Monetary Interchangeability: are different USD-based stablecoins exchangeable with each other at par?
1. Network Interoperability
Because the GENIUS Act does not require issuers to support any technical standards across chains or wallets, this creates a risk that stablecoins will operate in isolated silos. For example, a stablecoin on Ethereum might not interoperate with the Solana version of that stablecoin.
The BIS has warned that a stablecoin issued on different blockchains may not interoperate cleanly. Without guidance, the U.S. could end up with a digital dollar landscape badly fractured by incompatible technical standards, which could affect liquidity depth and user experience.
2. Monetary Interchangeability
Beyond technical standards, however, lies a deeper issue of monetary interchangeability. This is the idea that all stablecoins, like all dollars, should be usable at equal value: ideally a dollar should always be worth a dollar, regardless of its form, whether it is held as a bill, in a bank account, or as a stablecoin. There are many structures in our monetary system to try to ensure this for commercial bank deposits (though it doesn’t always hold all the time). The BIS argues that many stablecoins fail this “singleness of money” test because they are not always redeemable at par or interchangeable across users.
The GENIUS Act does not address
whether stablecoins from different issuers should be fungible, or
how to ensure par value between similar stablecoins.
This omission opens the door to a potentially fragmented and fragile payment
landscape. While some analogies compare this potential outcome to Wildcat Banking (when private banknotes traded at varying discounts), a more nuanced view by Nic Carter suggests stablecoins could evolve toward a model of competitive digital dollars, where interoperability standards and issuers determine trust. Such an outcome would deviate from the singleness of money in two respects; there would be no assurance of acceptance of any given stablecoin as payment and differences in valuations would imply deviations from par-value.
Smart Contracts and Technical Security
The GENIUS Act is silent on the technical infrastructure underpinning stablecoins, which are driven by software called smart contracts: this technology governs issuance, redemption, transfers, and other functions. To date, stablecoin issuers decide for themselves whether to obtain their own technical audits and claim to follow best practices, but this approach lacks transparency, accountability, and enforcement. The GENIUS Act advances no requirements for technical audits, open source transparency, or even secure key management; it remains to be seen whether regulatory agencies will seek to fill those gaps to strengthen public confidence in stablecoin issuers.
Failing to address these technical concerns risks creating a stablecoin that may be legally compliant, but technically insufficient. And if something does go wrong, there’s no clarity about who might be responsible or whether redemptions would still be enforceable.
Furthermore, the stablecoin ecosystem is highly integrated across many infrastructure layers, like wallets and bridges, which have been frequent targets of attacks in crypto markets. Without minimum risk standards for these technical integrations, GENIUS Act-compliant stablecoins may still be vulnerable.
Notable Policy Choices in the GENIUS Act
The GENIUS Act includes specific language around yield bans, algorithmic stablecoins, and the Bank Secrecy Act. In this section, we examine how these inclusions may raise design tensions, policy debates, or implementation challenges.
Yield Ban
The GENIUS Act explicitly prohibits stablecoin issuers from paying interest or yield to holders, but does not ban third-party platforms, including exchanges, from offering yield-bearing products for stablecoins, as well as those used as collateral in DeFi protocols. While framed as a consumer protection measure, this ban may have more to do with protecting the traditional banking system from competition. Furthermore, by preventing stablecoin holders from earning yield, the entire yield is instead captured by the stablecoin issuers.
In 2022, the Federal Reserve researched whether stablecoins could drain deposits from traditional banks and determined that reserves are recycled through bank portfolios. Still, many banks are afraid of losing consumer deposits to stablecoins, which is why we will likely see a big push towards banks developing their own stablecoins (and perhaps a push for allowing yield on stablecoins…)
Currently, we do not believe stablecoins will obviously drain overall deposits from the banking system since bank deposits are used to purchase stablecoins and the backing assets. We plan on investigating and writing more about this in the future. An under-explored area is how stablecoins might affect the money supply, price level, and effectiveness of monetary policy. Money currently used by the public (which economists call “M2”) is composed primarily of bank deposits and cash. If stablecoins serve similar functions, they should be added to M2. Importantly, stablecoins increase M2 overall, since they do not affect the volume of bank deposits, which are determined by bank lending and central bank reserves.
Less clear is the effect of stablecoins on a broader definition of money supply that includes MMF units and overnight Treasury repos (M3). The GENIUS Act allows stablecoin issuers to hold these securities as reserve assets. The increased demand will cause M3 to increase to the extent that it results in an increased issuance of MMF units or Treasury repos. But there is a question about whether, and to what extent, these Treasury-backed securities can increase supply, given a fixed stock of outstanding Treasuries.
The effect of the increased money supply induced by stablecoins on inflation may depend on how stablecoins are used. Do stablecoins displace transactions previously made with bank account money? Are stablecoins used in transactions that cannot be undertaken by conventional money?
Finally, the effect of stablecoins on monetary policy is unclear. Currently, the central bank impacts the financial system through its control of the volume of bank reserves and its transactions on the inter-bank and repo markets. How will stablecoins affect the transmission of changes in these variables to the economy?
The current yield ban prevents stablecoins from looking like bank deposits, thus capping potential upside for users and protecting incumbents. As both new entrants join and incumbents enter the stablecoin fray, the pressure to revisit this restriction may grow.
What About ‘Non-Payment’ Stablecoins?
The GENIUS Act carves out the only way for payment stablecoins to be issued in the United States. A payment stablecoin is defined in the Act as a digital asset that:
1) is intended for use as payment or settlement, and for which there is an issuer who
2) will redeem for par value (e.g., $1), and
3) represents it will maintain a stable value pegged to an amount (e.g., $1),
If a token meets each of the three tests, is issued by a permitted payment stablecoin issuer (PPSI), and is backed by high-quality, liquid assets, then it may be issued and used in the United States.
Section 11 of the GENIUS Act explicitly cites the need to study endogenously collateralized stablecoins, or those that are represented to be pegged to a value and “[rely] solely on the value of another digital asset created or maintained by the same originator to maintain the fixed price” (e.g. Terra’s dependence on LUNA). It is unclear to us if the intent is to categorize endogenously collateralized stablecoins as payment stablecoins or not, given that they might also be used for payment and settlement, but the Act currently does not allow them to be issued in the United States.
But use cases are not entirely distinct! Additional questions begin to arise when we consider models that do not cleanly follow the above definitions:
Payment Stablecoin Test #1: How will regulators judge intent? What if a token is widely used as collateral in DeFi trades, but is also used as settlement? Would that qualify as a payment stablecoin? A more detailed example: Frax and Ethena are two hybrid algorithmic stablecoin models that aim to be pegged to $1, are marketed for use as collateral in DeFi payments (and used as settlement instruments), and promise stable value: sounds like a payment stablecoin. Because they rely in part on other tokens, they do not meet the 1:1 HQLA requirement set forth by the GENIUS Act. But, are they payment stablecoins that are illegal to be issued in the United States or should they be treated as non-payment stablecoins because of their hybrid DeFi use cases?
Commodity-Backed Stablecoins: Pax Gold (PAXG) is a stablecoin pegged to the price of one ounce of gold. Using the Act’s current tests, we surmise PAXG would not qualify as a payment stablecoin and is thus a non-payment stablecoin. But does that make it a non-payment stablecoin subject to other future rules? What if people begin to use PAXG for payment and settlement?
We will likely see innovative stablecoin models emerge in the coming years that will require cleaner definitions. Without this, the current language could become either too tight or too easy to circumvent.
And briefly, the GENIUS Act primarily concerns who can issue payment stablecoins, not who can use these assets. While the Act prevents some tokens from being issued in the United States, it does not explicitly prevent individuals in the secondary-markets from holding these same tokens.
Surveillance and Bank Secrecy Act / AML Scope Creep
The GENIUS Act requires permitted stablecoin issuers to comply with the Bank Secrecy Act (BSA) and related Anti-Money Laundering (AML) regulations. The BSA was designed for banks and intermediaries, where payments occur between parties who have verified each other’s identity (also called “know your customer” or KYC rules), requiring providers to monitor transactions and report suspicious activity to regulators. Stablecoin issuers, thus far, have not been required to KYC every user transacting in a stablecoin. Applying this framework to smart contract based stablecoins is not straightforward, especially when most people who access stablecoins outside the primary market are not KYC’d.
Currently, the GENIUS Act provides no interpretation for how the BSA might apply to stablecoin issuers, and who else in the stablecoin ecosystem may be swept into BSA compliance (e.g., wallets, bridges, etc.) Broad inclusions under the BSA may impose compliance burdens on actors far removed from the stablecoin issuer.
Conclusion
The GENIUS Act is a landmark moment for stablecoin regulation in the US and a step forward in bringing private digital dollars into the regulated financial system. But now comes the hard part: regulators from agencies like the Fed, Treasury, OCC, and FinCEN will need to work together to decide how these rules are implemented, enforced, and evolved.
The law leaves open critical questions, some of which we have highlighted above. These matters, however, are not just theoretical design debates; we believe they are central tenets that will decide the future of stablecoin innovation and reliability in the United States.
Authors: Ashwanth Samuel, Dan Aronoff, Anders Brownworth, Neha Narula
This post is part of a summer blog series from the MIT Digital Currency Initiative exploring the financial and technical risks of stablecoins. Read:
1:1 Redemptions for Some, Not All
Stablecoins and the Limits of Existing Analogies
Will Stablecoins Impact the US Treasury Market?
The GENIUS Act is Now Law. What’s Missing?
These posts preview findings from a forthcoming research paper, written in collaboration with MITRE, that will be released later this year. The views expressed are those of the authors and do not necessarily reflect the positions of MIT or any other affiliated institution.