Can the three US encryption bills change the "rules of the game"?

Author: luke Song, Sam, Li Zhongzhen, Pang Meimei

Recently, the U.S. House of Representatives passed three legislative drafts on encryption regulation with an overwhelming majority of votes in favor, namely the Genius Act, the Clarity Act, and the Anti-CBDC Surveillance State Act. Among them, the Genius Act, which is called "an important step in consolidating the United States' dominance in global finance and encryption technology," was officially signed into law by Trump on the 18th, and was also reported by domestic CCTV, Caijing and other media. In this issue, we posed five questions to the distinguished members of the Web3 Compliance Research Group: "What does the Genius Act aim to do?", "How should we understand the Clarity Act's division of responsibilities between the SEC and the CFTC?", "Why is the US opposing CBDCs?", "Will these three bills inspire other countries to adopt crypto regulation?", and "How will they impact the operations of crypto startups?" Let's get to the point. Q1: Can you explain in plain words what the Genius Act aims to do? Do stablecoins from countries outside the US still have a chance to compete? Luke: Simply put, the Genius Act establishes a strict legal framework for stablecoins (like USDT and USDC) and their issuers. It clarifies the definition of a stablecoin and ensures its legal recognition. This protects the rights of both issuers and consumers who use stablecoins. The bill consists of three main parts. First, the bill defines stablecoins as "payment stablecoins." It explicitly states that stablecoins do not possess the attributes of securities or commodities. This means that stablecoins themselves do not have investment value-added properties. Second, it strictly stipulates that stablecoin issuers must manage the principal of stablecoins redeemed by consumers in a 1:1 liquidity ratio. They must also disclose their ledgers monthly to ensure 1:1 liquidity. Furthermore, if a stablecoin issuing company reaches a market capitalization of over $50 billion, it must submit annual audit reports and be subject to dual state and federal oversight to prevent a "decoupling" collapse like the Terra/Luna case. Third, it states that if the company issuing the stablecoin goes bankrupt, users' funds will have priority for compensation, effectively providing a safety net for them. There are also Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements, similar to those of banks, to ensure transaction transparency and prevent bad actors from exploiting loopholes. Sam: The Genius Act regulates the issuance and trading of stablecoins, and it's currently very strict. It requires that any stablecoin issuing or circulating in North America must obtain a federal or state license, such as that of a regular bank or regulated financial institution. This means that companies seeking to continue operating in the stablecoin business must be fully prepared, disclose information, and comply with AML regulations. This wave of activity is squarely targeted at Tether, whose market capitalization currently stands at around $1,600. During the previous two industry cycles, Tether faced the daily risk of a collapse, primarily due to its opaque reserves and unilateral auditing practices. Consequently, Tether was often mocked by industry insiders, with its annual KPI being to hype its own collapse and then sell off its shares at a low price. Furthermore, as the leading stablecoin, Tether commands over 70% of the market. The fact that such a seemingly volatile stablecoin has achieved this scale is undoubtedly a source of jealousy for consortiums. However, for these consortiums to enter the market, they must first design sound market rules so that they can legally profit. Therefore, the Genius Act essentially provides an entry point for new players, or rather, for old money. The same is true for stablecoins outside of North America. Currently, mainstream stablecoins are still pegged to fiat currencies. A strong fiat currency strengthens the corresponding stablecoin, while a weak fiat currency doesn't stand a chance. For example, the West African naira is out of the question. However, anyone can issue a dollar-denominated stablecoin as long as they have sufficient dollar reserves. Ultimately, it all comes down to public confidence in your foreign exchange reserves. Another factor is migration costs: both the education and migration costs associated with stablecoins are extremely high. Therefore, crypto-friendly countries and regions have a stronger competitive advantage. The Genius Act created the concept of payment stablecoins and detailed the requirements and regulatory framework for issuing such stablecoins in the United States. The Genius Act stipulates that payment stablecoin issuers must maintain at least a 1:1 reserve asset ratio, and that reserve assets must consist only of highly liquid dollar assets such as US dollars and US Treasury bonds with maturities of 93 days or less. The Genius Act aims to siphon global capital into highly liquid US dollar assets, further increasing US dollar liquidity, establishing the US dollar's dominance on-chain, and consolidating its hegemony. ② Do stablecoins from countries outside the United States still have a chance to compete? This question actually depends on the overall strength of these countries and regions. I believe China, the EU, and Japan still have a chance, but other countries and regions don't. Fat Meimei: For the past few years, no one has been able to clearly define what stablecoins are, what the requirements are for issuing them, who should be responsible for regulating them, and what to do if problems arise. The Genius Act aims to end this regulatory vacuum and address these issues. Of course, while the Genius Act further strengthens the US dollar's dominance in the global reserve and payment systems by forcing stablecoins to reserve US Treasury bonds and US dollar assets, it also further consolidates the US dollar's international monetary hegemony. However, the primary function of stablecoins is cross-border payments and settlements. Stablecoins can enhance the flexibility and efficiency of trade settlements without altering national monetary policies. Many countries around the world are developing stablecoins. As the world's largest trading nation in goods, China has a natural strategic need to optimize the efficiency and costs of cross-border settlements. We have a tremendous opportunity, and that opportunity lies in Hong Kong. On May 21st of this year, the Hong Kong Legislative Council passed the Stablecoin Conditions Bill, becoming the first jurisdiction in the world to implement full-chain regulation of stablecoins. Hong Kong plays a key role in promoting the development of stablecoins, and China possesses unique advantages and strong competitiveness. Q2: How do you interpret the Clarity Act's division of responsibilities between the SEC and CFTC? What impact will the definition of a "mature blockchain" have on the industry? Luke: Simply put, the Clarity Act aims to address the "gray area" of digital asset regulation. By clearly dividing the responsibilities of the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), it avoids regulatory overlap or vacuums and allows for more orderly development of the crypto industry. Simply put, the SEC primarily regulates digital assets with expected returns like stocks (such as certain tokenized securities), while the CFTC is responsible for those more like "commodities," such as Bitcoin and Ethereum, whose value primarily derives from actual usage rather than dividends. This will improve the definition and position of the entire cryptocurrency market within the legal framework. It also includes a series of reduced regulations on DeFi to encourage the implementation and innovation of DeFi projects. It's worth mentioning the definition of "mature blockchain" in the bill. The bill defines a "mature blockchain" as a network that meets statutory requirements (such as decentralized governance, distributed ownership, and no single entity controlling it) through a certification process submitted to the SEC. The SEC may also issue additional rules to further refine these criteria. Specifically, certification includes demonstrating the network's degree of decentralization, market adoption, openness, and interoperability. If certification is passed (usually effective by default within a certain period of time after submission, unless the SEC objects), the blockchain is considered "mature." Sam: It's a typical example of decentralization, with each party managing its own affairs. The SEC regulates security tokens, POS algorithms, DeFi, and the like; decentralized blockchains that meet the definition of mature blockchains are classified as commodities and fall under the purview of the CFTC. Mature blockchains are more favorable for projects using the Proof-of-Work (PoW) algorithm, as PoW is the original cryptocurrency and is fully distributed. These projects pursue technological excellence, optimizing algorithms and performance, and practicing the Code Is Law principle. The industry has long held that a successful technology stack doesn't guarantee a successful blockchain. Furthermore, the constant onset of regulatory oversight, including various types of securitization, has led to a narrowing of access for technical personnel. Those with real technical expertise were hesitant to enter, fearing a potential rebuke. Now, everyone can code with peace of mind without worrying about the SEC's knocks. Miners can also expand production freely, alleviating some of the pressure on the chip industry. Hardware prices will fall somewhat. The payback period for PoW has doubled from the previous round to the most recent year, and it appears to be on track to fall. Subsequently, each will play its own game: the SEC will bring PoW to the financial market to earn APY, while the CFTC will bring PoW back to the original purpose of blockchain. Attorney Li Zhongzhen: ① The Clarity Act resolves the confusion in the division of regulatory responsibility between the SEC and CFTC in the crypto sector. It clarifies that digital commodities fall under the CFTC's jurisdiction, while restricted digital assets fall under the SEC's. This further improves the US regulatory framework for crypto. A clear and unambiguous regulatory environment will contribute to the development of the crypto industry. No emerging industry fears regulation; what it fears is the uncertainty caused by unclear regulatory responsibilities. ② The definition of "mature blockchain" provides a relatively objective standard for the industry: the largest holder must not exceed 20% of the total, and no individual or entity can unilaterally control the blockchain or its applications. "Mature blockchain" allows projects initially issued as securities to transition to commodities after meeting the "mature blockchain" criteria, shifting oversight from the SEC to the CFTC. This is very friendly to the crypto industry. If a project is defined as a security and regulated by the SEC, the compliance costs are prohibitive, making them unaffordable for many startups. However, if it is defined as a commodity and regulated by the CFTC, the compliance costs are significantly reduced. Simply put, this bill labels digital assets. The Clarity Act clearly divides digital assets into different categories, clearly demarcating the regulatory scope of the SEC and CFTC. The CFTC primarily regulates securities products, with higher and more stringent requirements, while the SEC's oversight is much more relaxed. Therefore, I believe that this division of labor provides a more relaxed compliance path for projects truly committed to blockchain. The bill's most ingenious design is that it creates an evolutionary path for digital assets from securities to commodities, providing a "graduation path" for these projects from "securities" to "digital commodities." The concept of a mature blockchain system is primarily used to determine whether a blockchain has achieved a certain level of decentralization, thereby determining whether its tokens can be converted from "securities" to "digital commodities." Today, blockchain technology is becoming increasingly widespread, and the industry is undergoing a paradigm shift. The criteria, dimensions, and characteristics used to distinguish a blockchain as reliable have entered a mature stage. The bill provides precise definitions, clarifies details, and assesses standards, giving entrepreneurs greater clarity on how to meet these standards and providing greater certainty for ICOs and IDOs. Q3: The US Anti-CBDC Act seems to contrast sharply with the efforts of some countries to promote CBDCs. Why is it against CBDCs? Do you have any further comments? Luke: The US ban on CBDCs is primarily due to the following reasons. First, concerns arise about the Federal Reserve's increased power over the privacy of individuals' financial assets. Second, concerns arise about the stability of the financial system. Third, there are concerns about global monetary centralization. First, privacy and surveillance risks are core objections. A CBDC is essentially a digital banking system issued directly by the central bank (similar to a stablecoin issuer, but at the national level), capable of tracking every transaction in real time. This could be abused for government surveillance or by human error, large or small, infringing on individual financial privacy and freedoms. Supporters of the bill argue that this would create a "surveillance state," similar to China's Digital Renminbi, which, while convenient, also strengthens the central bank's ability to monitor transactions. In contrast, the United States emphasizes protecting constitutional rights and individual privacy, avoiding excessive government interference in private financial assets. Second, CBDC would strengthen disintermediation and impact the Federal Reserve's implementation of monetary policy. Allowing the central bank to directly serve individual consumers would directly weaken the role of commercial banks, potentially leading to a loss of commercial bank deposits, intensified bank competition, and even a wave of bank failures, undermining the existing economic structure. The Federal Reserve's 2022 report noted that such a radical change could amplify systemic risks. CBDCs are primarily intended to improve payment efficiency and financial inclusion, but the US believes these benefits outweigh the potential risks. There are also concerns about the concentration of power and global competition. CBDC opponents worry that CBDCs will strengthen central banks' control over monetary policy and even foster digital hegemony internationally, such as if a country's CBDC dominated global trade, threatening national sovereignty. The US is choosing to maintain the dollar's traditional status by opposing CBDCs and promoting private stablecoins (such as USDC) as alternatives to foster market-driven innovation. Sam: The Federal Reserve is not affiliated with any political party and therefore doesn't engage in political donations. It will undoubtedly pay the "protection fee" first. If the Fed goes, no one else will. Furthermore, stablecoins, such as algorithmic stablecoins and cryptocurrency-pegged stablecoins, still have some decentralized attributes. With new technologies, algorithms, or solutions, there is still room for development. CBDCs are completely centralized, which contradicts the very concept of crypto. Decentralized assets are at the core of these three bills. Privacy, free finance, and censorship resistance are all essential. The release of CBDCs would have a significant impact on the overall situation. Simply put, the Federal Reserve issuing currency is like taking off your pants and farting. These three bills will become meaningless. Lawyer Li Zhongzhen: The US government does not have the right to issue US dollars; that right resides with the Federal Reserve. A major reason the US government is pushing the "Genius Act" is to expand the dollar without the Federal Reserve. Allowing CBDCs would greatly benefit the Federal Reserve, but would not offer much practical benefit to the US government. Only by restricting the Federal Reserve can the government achieve fiscal freedom. Some countries exploring CBDCs already have the right to issue their own currencies, so there is no conflict of interest for these countries to issue CBDCs. Fat Meimei: In China, everyone is familiar with the digital RMB, and the country has been promoting it. This is actually an example of a CBDC. CBDCs themselves have obvious benefits, such as the convenience and efficiency of payment and settlement. Given such clear advantages, why oppose them? We need to look at this issue from a broader perspective. Generally speaking, it's difficult for individuals to connect with the central bank, so commercial banks act as an intermediary. CBDCs are blockchain-based online banking systems operated by the central bank. If individuals could directly access the central bank for deposits and loans, commercial banks would become unnecessary over time. I believe a large number of commercial banks might be forced to close, a situation that would directly undermine the stability of the existing economic and financial system. Furthermore, the CBDC system is not completely decentralized. If a CBDC is issued and circulated, how will personal financial assets be protected? Know your customer (KYC) and anti-money laundering (AML) procedures will still be required. How would this differ from the online banking we use today? It's like simply adding blockchain technology to an already electronic banking system, with no other substantial improvements. The end result might be no improvement, while creating numerous potential problems. Isn't that a case of losing more than gaining something? Personally, I prefer a cautious approach, avoiding the blind, widespread rollout of CBDCs or perhaps learning from Hong Kong's "sandbox" approach. Q4: Will this inspire regulatory action in places like the EU and Asia? How will this US move impact the global Web3 regulatory landscape? Luke: The US's 2025 passage of the Genius Act, the Clarity Act, and the Anti-CBDC Act could potentially lead to EU and Asian countries adopting its crypto regulatory model. The EU's MiCA regulations may be refined to align with US standards. Japan and Singapore may follow suit with stablecoin regulation. India may balance innovation with compliance. China may leverage its opposition to CBDCs to expand the influence of the digital RMB or, like the US, vigorously promote the use of the Renminbi stablecoin. The global Web3 regulatory landscape will trend toward standardization, encouraging private stablecoins and DeFi. However, the US's anti-CBDC stance may cause it to lag behind in CBDC payment systems, while simultaneously boosting the status of other private cryptoasset platforms. This could trigger global regulatory competition, with capital flowing to regulatory-friendly regions. It could also exacerbate geopolitical friction and test US leadership in the digital economy. Sam: The EU isn't necessarily the case. Some Asian crypto regulations need to be emulated, as the EU has long been regulating cryptocurrencies. In 2014, Germany became the first country to accept Bitcoin as a currency, followed by the Netherlands, France, and others. Last year's statistics showed that Europe had over 2,700 crypto licenses. Canada's licensing and regulation were both earlier and more extensive than North America's. However, Asia certainly needs to learn from this, as it currently has the fewest, even fewer than Poland alone. These data show that when it comes to crypto regulation and crypto-friendliness, the US is only moderately keeping up. Their sheer size makes it difficult to turn around. However, regulations for stablecoins and the like will likely refer to North American laws to align with these regulations. After all, mainstream stablecoins are still primarily pegged to the US dollar, which itself carries strict controls. This round of North American regulation will also accelerate the implementation of regulations across the globe, primarily for stablecoins. With the potential for cryptocurrency taxation, regulatory standards across major countries and regions will soon converge, leading to greater standardization and transparency across the industry. The 100x-per-coins of the past are unlikely to return. Web3 is no longer a get-rich-quick scheme, but it will have long-term development. Lawyer Li Zhongzhen: ① Hong Kong is ahead of the curve when it comes to stablecoin regulation. However, the United States is the fastest country in the world to establish a detailed regulatory framework for cryptocurrencies other than stablecoins. Other countries can learn from the US regulatory model to improve their regulatory frameworks based on their own national conditions, such as implementing tiered and categorized regulation of crypto assets and clarifying regulatory agencies and systems. ② The United States has fired the first shot, and I believe other countries will soon follow suit. It won't be long before the global Web3 regulatory landscape continues to improve, and even mutual recognition of regulatory compliance will be achieved. Fat Meimei: The Genius Act establishes a solid regulatory framework for stablecoins. The clear bill clearly defines digital asset categories, the corresponding regulatory agencies, and the regulatory responsibilities of different agencies. The anti-CBDC bill explicitly prohibits the Federal Reserve from issuing central bank digital currencies to individuals, preventing excessive financial regulation and safeguarding the role of commercial banks in the financial system. Previously, regulatory uncertainty in the United States has persisted. Firstly, different states have adopted different regulatory approaches and strictness, and secondly, there has been ongoing debate over whether cryptocurrencies are securities or commodities. This uncertainty has led many startups to relocate to other regulatory-friendly jurisdictions. The implementation of these three bills could help the United States seize the lead in digital asset innovation. Their regulatory framework could serve as a global reference, prompting other countries to accelerate the development of crypto-related laws. This could usher in significant changes to the digital asset ecosystem in the United States and globally. Q5: These three bills are considered a turning point for the US and the entire crypto industry, moving from "unbridled growth" to "rules-based governance." How will they impact the compliance costs and operating models of Web3 startups? Luke: It's clear that the three bills are pushing the US crypto industry from "wild growth" to a more rule-based landscape, significantly impacting the compliance costs and operating models of Web3 startups. In the short term, compliance costs will increase startup expenses (legal costs can account for 40% of financing) due to stablecoin disclosure, auditing, and KYC/AML requirements, potentially leading to an outflow of smaller projects. However, in the long term, clearer regulations will reduce litigation risks and attract VC investment. Operating models will shift from ambiguity to compliance, focusing on decentralized governance and tokenizing RWAs to obtain exemptions (such as the $75 million cap on ICOs), shifting from rapid iteration to innovation within legal frameworks. This may squeeze smaller projects in the short term, but in the long term it will enhance industry maturity, attract global resources, and establish a framework recognized by international regulators. This may influence regulatory compliance in other regions regarding the cryptocurrency market (such as the EU's MiCA and Singapore's DTSP). Sam: To some extent, this marks a transition for Web3 startups from "unregulated innovation" to a new era of "compliance-first." Several aspects are foreseeable. For example, the barrier to entry for startups will be significantly higher. Coin issuance will no longer be possible, and licensing will become standard. Compliance costs will also skyrocket, with lawyers, audits, KYC/AML, and other expenses becoming essential budgets. The industry will also accelerate the elimination of uninnovative, unprofitable, or shady projects. However, PoW miners are likely to benefit the most, especially with Bitcoin. Only compliant businesses can scale and thrive long-term, while also avoiding the phenomenon of bad money driving out good. But for crypto natives, Web3 is Web3, a business, and encryption is encryption, a technology. Native encryption is permissionless, and true encryption will find its place.

Lawyer Li Zhongzhen:

With the implementation of the Genius Act, the Clarity Act, and the Anti-CBDC Act, project owners need to determine their compliance path based on their project types:① Projects issuing stablecoins must invest substantial capital to obtain the appropriate licenses and establish an independent audit system and bankruptcy isolation mechanism. This is particularly true with regard to reserve assets; a 1:1 reserve ratio places high demands on the project owner's financial strength.

② For non-stablecoin projects, project owners need to clearly understand whether they are securities or commodities. In the past, when there was no regulation, project owners might only need component technology development teams, security teams, and marketing teams to develop narratives, raise funds, and launch on the blockchain. However, this is no longer possible. Therefore, in the early stages of a project, project owners must establish a professional compliance team to cope with SEC or CFTC oversight. The compliance costs can even exceed R&D costs, making it difficult for small projects with insufficient capabilities to succeed. Fat Meimei: Yes, these three bills together establish clear rules of the game for the crypto industry. In the past few years, the lack of clear rules in the crypto industry has led to legitimate entrepreneurs facing capricious regulatory oversight, while speculators have exploited legal ambiguity to profit. These three bills will reverse this situation. The bills set detailed requirements for stablecoin issuers, trading platforms, and DeFi projects, and also list numerous prohibited behaviors. Asset reserve requirements and fund segregation systems increase capital and management costs, while financial disclosure and auditing increase operational costs. For digital assets that were previously in a murky area, determining their regulatory attributes requires additional resources and compliance costs. Furthermore, some countries or institutions planning to issue central bank digital currencies may need to recalibrate their strategies and plans, increasing compliance costs and uncertainty. The increase in compliance costs may cause some small projects to exit the market due to being unable to bear the costs, but it also provides a clear path for those excellent projects to develop long-term operating models in accordance with legal provisions to ensure the stable and long-term operation of the projects.