Analysis of the GENIUS Stablecoin Act

Author: CoinW Research Institute

On May 19, 2025, the U.S. Senate passed the GENIUS Act, the full name of which is the Guiding and Establishing National Innovation for U.S. Stablecoins Act, with 66 votes in favor and 32 votes against. This is the first time that the United States has established a federal regulatory framework for stablecoins. The bill has not yet officially come into effect and still needs to be passed by the House of Representatives and signed by the President. If it eventually becomes law, it will have a far-reaching impact on the issuance and use of stablecoins. This article will analyze the core provisions and potential impacts of the bill.

1. Core provisions of the GENIUS Act

In this bill, stablecoins are clearly defined as payment stablecoins, which are digital currencies that are anchored to legal currencies such as the US dollar and can be directly used for payment or settlement. The value of such payment stablecoins should always be pegged to fiat currencies such as the US dollar at a 1:1 ratio. There must be real and transparent reserve support behind them, and the reserve assets do not include crypto assets that are stabilized by algorithmic mechanisms or have high volatility. Users can exchange them for fiat currencies at any time. This definition clarifies the payment attributes of stablecoins, and they are not tools for speculation or arbitrage.

1.1 Issuer Qualification

According to the GENIUS Act, both domestic and overseas institutions that want to issue or circulate stablecoins in the United States must meet strict issuer qualification requirements.

For domestic issuers, only three types of institutions are eligible to issue stablecoins:

1. First, non-bank institutions holding federal licenses, such as some licensed fintech companies. Such institutions are not banks, but have been approved by the federal government. For example, Circle, the issuer of USDC, is not a banking institution and cannot lend or absorb deposits like a bank, but it has obtained a U.S. "federal license", so it can issue stablecoins in the United States in compliance with regulations. The second is a regulated bank subsidiary, which means that a bank can issue stablecoins through its subsidiaries. This shows that the U.S. government allows traditional banking institutions to participate in the stablecoin market through their subsidiaries. The third is a state-level issuer approved by the U.S. state government and whose regulatory standards are recognized by the Treasury Department as being basically consistent with federal standards. These compliant issuers must maintain a 1:1 asset reserve (such as cash, treasury bonds or central bank deposits), and publicly disclose the reserve situation and redemption policy on a regular basis, and accept third-party audits. If the scale of the issued stablecoin exceeds US$10 billion, it must be subject to federal supervision, with the Federal Reserve or the Office of the Comptroller of the Currency (OCC) as the regulatory agency. This is mainly for some small-scale projects in the early stages of development. They can choose to start compliance at the state level and then gradually expand to the federal level.

For overseas issuers, even if the company is established overseas, as long as its stablecoin is facing the US market, it must comply with US regulatory rules.

First, these institutions must come from countries or regions with regulatory systems equivalent to those of the United States, such as the United Kingdom, Singapore and other countries or regions that have established a digital asset regulatory framework; for those from regions that have not yet established a stablecoin regulatory system, they may not be able to obtain a license.

Second, the issuer must register with the Office of the Comptroller of the Currency (OCC) of the United States.

In addition, it must be able to cooperate with the legal orders of the US government (such as freezing or destroying tokens).

And keep sufficient reserves in US financial institutions to ensure that they are able to meet the redemption and liquidity needs of US users.

In general, whether it is domestic or foreign institutions, the United States hopes to include stablecoins in the same regulatory framework as traditional finance through the GENIUS Act to ensure their security, transparency and compliance, and prevent stablecoins from becoming a "gray area" in the financial system. This also means that in the future, only those institutions that are able to meet high-standard regulatory requirements can issue and legally circulate stablecoins in the United States.

1.2 Reserves and transparency

The GENIUS Act also made clear requirements for the asset reserves of the issuer. Companies that issue stablecoins must first ensure that for every stablecoin issued, there is a safe asset worth $1 to back it up. These assets must be safe and liquid assets such as cash and short-term U.S. Treasury bonds. Stocks, corporate bonds and other risky assets cannot be used as reserves. At the same time, in order to prevent the misuse of funds, these assets used for security must also be managed separately from the company's daily operating funds and cannot be used for other purposes, such as investment or mortgage. In addition, the bill also specifically stipulates that stablecoins cannot pay interest or income to users, that is, stablecoins are a payment product, not an investment product, and cannot become a tool to "steal business" from bank deposits. Stablecoins cannot become "high-yield digital deposits", which shows us a possible trend: stablecoins are not allowed to pay interest, but bank deposits can have interest, which means that banks may take the initiative to enter the field of stablecoins, launch their own digital dollars or digital euros, and use the two cards of "compliance + interest" to attract users and seize market share. Although stablecoins issued by banks cannot directly pay interest, banks can provide a more attractive overall financial experience than ordinary stablecoins through "supporting accounts, cashback mechanisms" and other methods, thereby participating in the competition in the field of stablecoins. The future stablecoin market may no longer be just a competition between various types of stablecoins, but more likely a competition between traditional banks and crypto companies.

At the same time, in order to ensure the openness and transparency of reserve assets, the issuing company needs to publish the specific situation of its reserves once a month, and it must be signed and confirmed by the company's senior executives such as CEO or CFO, and professional accounting firms must be invited to review these data. If the total amount of stablecoins issued by this company exceeds 50 billion US dollars, it will also need to conduct a full-year financial audit to further ensure the safety of reserve funds and user funds.

1.3 Anti-money laundering and compliance

According to the GENIUS Act, all companies issuing stablecoins must comply with the anti-money laundering regulations under the Bank Secrecy Act, just like traditional banks. In other words, these companies are regarded as "financial institutions" under US law and must fulfill their obligations to monitor the flow of funds, prevent money laundering and terrorist financing.

All companies issuing payment stablecoins must establish a complete set of "anti-money laundering" and "compliance" processes and systems in accordance with government requirements. The purpose of this is to prevent these digital currencies from being used for illegal activities, such as money laundering, financing terrorist activities, evading economic sanctions, etc. Including but not limited to:

• Formulate an anti-money laundering policy. That is, the company needs to issue a manual on how to prevent money laundering and tell employees and regulators what they plan to do.

• Appoint a person in charge to manage the entire compliance system. The company must find a person with power and understanding of compliance to be responsible for the entire anti-money laundering system. Make sure this is not a formality, but someone is really watching these things.

• Identify and verify user identity (KYC). Everyone must undergo identity authentication before using this stablecoin product. The issuer needs to know who is using its stablecoin product.

• Check whether the user is on the sanctions list. The issuer needs to ensure that its customers are not people who are "blacklisted" by the US or other governments, such as terrorists, drug dealers, officials of sanctioned countries, etc.

• Monitor and report large transactions or suspicious behavior. For example, if someone suddenly transfers $1 million or frequently transfers money to an unfamiliar address, the system must be able to identify these abnormal operations and report them to the regulator.

• Keep transaction records for the regulator to review. The company must archive every transaction, such as who transferred to whom, how much was transferred, and when it was transferred, in case the government checks the accounts.

• Prevent any transactions prohibited by law. Once a transaction is found to violate the law, such as transferring money to a black market website, the company must be able to lock the transaction so that it cannot proceed.

In addition to institutional requirements, issuers must also have technical capabilities to quickly freeze certain accounts or block specific transactions once ordered by the Ministry of Finance or the court. For example, if an address is suspected of a crime and the US government issues an order to promptly operate the account, the issuer must be able to execute the order and perform operations such as freezing (making it unable to transfer money), destroying (completely invalidating), and blocking (making it unable to trade) these token accounts.

If a stablecoin issued by a foreign company wants to enter the US market, it must also comply with US anti-money laundering and sanctions regulations. If it does not meet the requirements, the US Treasury will put it on the "blacklist" and prohibit US platforms from providing trading services.

The core purpose of this system is to ensure that stablecoins will not become a tool for money laundering, evading sanctions or other illegal activities.

1.4 Consumer Protection

The core purpose of the "GENIUS Stablecoin Act" is to protect ordinary users so that everyone does not have to worry about the safety of funds, being misled or encountering the risk of running away when using stablecoins.

In addition to the series of requirements for issuers and asset reserves mentioned above, the bill also requires issuers to publicly disclose the composition of reserves every month to let consumers know how their money is kept. In addition, the bill strictly prohibits misleading propaganda, such as saying that stablecoins are "guaranteed by the US government" or "FDIC insured", to prevent users from mistakenly believing that these coins are as safe as bank deposits. In fact, stablecoins are not bank deposits, are not protected by the government, and are not insured by the FDIC. If there is a problem with the stablecoin, such as depegging, payment failure, or bankruptcy of the issuing institution, users may not be able to get their money back. At this time, the risk needs to be borne by the user himself, and the government will not pay.

At the same time, the bill also clarifies the coordination mechanism between state supervision and federal supervision to prevent the issuer from using "regulatory arbitrage" to choose the state with the most relaxed supervision to evade management. When a stablecoin project regulated by a state develops to a certain scale, it must accept federal supervision, otherwise it cannot continue to expand its issuance.

Finally, if a stablecoin issuing company goes bankrupt, the GENIUS Act clearly stipulates that users' money must be paid first, before other creditors, and requires the court to speed up the liquidation process. This means that even if the company goes bankrupt, users have the hope of getting their funds back faster and with priority.

2. Potential Impact

Next, let's combine the provisions of the GENIUS Stablecoin Act to see which of the currently widely used stablecoins are in compliance with US compliance policies and which are relatively less compliant.

2.1 Fiat Reserve Stablecoin

The principle of fiat reserve stablecoins is that for every stablecoin issued, there is 1 US dollar or equivalent safe assets (such as cash or short-term US bonds) as a reserve. This means that users can theoretically exchange stablecoins for real US dollars at any time, so this type of stablecoin has strong stability and relatively low risk, and is widely used in transactions, payments and DeFi ecosystems.

Among this type, USDC is currently the most representative that meets US regulatory requirements. It is issued by the US company Circle with a license, operates transparently, and meets most of the regulatory requirements in the GENIUS Act. Therefore, USDC is expected to become one of the most policy-supported stablecoins in the future.

Another one that has attracted attention is PYUSD, which was launched by payment giant PayPal and issued in cooperation with licensed institution Paxos. Both institutions hold formal financial regulatory licenses in the United States, which makes PYUSD friendly in terms of compliance. And PYUSD is backed by PayPal, and will be more proficient in the development of daily financial scenarios such as payments, transfers and cross-border remittances in real life, which is in line with the US definition of stablecoins for payment scenarios.

The third one is FDUSD, which is issued by First Digital and registered in Hong Kong. It has a high degree of compliance and is backed by audits and assets. However, since the company is not registered in the United States, it still needs to be observed whether it is willing to cooperate with the relevant orders of US regulators (such as freezing and destroying user accounts when required by the government), which will affect its development prospects in the US market.

The USDT, the stablecoin with the largest market value, is issued by Tether, which is registered in the British Virgin Islands. It has not obtained a license from the US financial regulator and operates in a legal gray area. Although it is widely used, it may face strong regulatory pressure from the GENIUS Act under the background of increasingly stringent supervision, especially in terms of circulation and user confidence in the US market.

2.2 Decentralized Overcollateralized Stablecoin

Decentralized overcollateralized stablecoin is a stablecoin that does not rely on traditional banks or centralized institutions. Its core principle is that users pledge their encrypted assets (such as ETH, BTC) into smart contracts on the blockchain and generate stablecoins through "overcollateralization". This mechanism ensures that the currency value can be kept stable even if the market fluctuates.

Take DAI as an example, it is a well-known decentralized overcollateralized stablecoin issued by the MakerDAO protocol. Users can pledge a variety of crypto assets such as ETH and wBTC into smart contracts. As long as the pledge rate is high enough (usually above 150%), DAI can be generated. For example, if you pledge $150 worth of ETH, you can generate up to $100 of DAI, so that even if the price of ETH fluctuates, the system has buffer space. The biggest feature of DAI is that it runs entirely on the chain, without centralized control, and no one can freeze your account or destroy your assets, making it a truly "decentralized" stablecoin. But at the same time, this design also brings regulatory challenges: for example, the GENIUS Act requires the ability to cooperate with law enforcement, and the issuer must have the technical ability to operate user accounts at any time, and DAI cannot be unilaterally frozen or forced to operate, so it will be difficult to include it in the regulatory framework of this GENIUS Act.

In general, this type of stablecoin does not rely on banks or centralized institutions, and its operating logic relies on code and smart contracts. It is suitable for users who pursue the concept of decentralization, but due to its "unfreezable and uncontrollable" characteristics, it is also more difficult for them to be accepted by the US government as a legal means of payment.

2.3 Algorithmic Stablecoins

Algorithmic stablecoins are a type of stablecoin that relies on algorithms to automatically adjust market supply and demand to maintain price anchoring, and do not rely on real US dollar reserves or crypto asset collateral. This mechanism usually adjusts the amount of currency through "minting and destruction" - when the price is lower than $1, the system will "destroy" some stablecoins to reduce supply; when the price is higher than $1, it will "mint" more stablecoins to increase supply, thereby guiding the price back to around $1.

One ​​typical example is Frax, which adopts a hybrid model, that is, part of it is backed by real fiat currency reserves (such as USDC), and the other part is regulated by an algorithmic mechanism. When the price of 1 FRAX in the market falls to $0.98, the system will start the destruction mechanism, reduce the market supply, increase scarcity, and make the price rise again.

UST (TerraUSD), which was once widely watched but eventually collapsed, is an extreme case of a purely algorithmic stablecoin. UST is not backed by any collateral assets, but is tied to another token LUNA: 1 UST can always be exchanged for an equivalent amount of LUNA, and vice versa. This mechanism works well when the market is bullish, but once confidence collapses or there is a large-scale redemption, it will fall into a death spiral: a large number of USTs are exchanged, causing the price of LUNA to plummet, and then further out of control. In 2022, this caused billions of dollars in user asset losses, becoming one of the biggest disasters in the history of crypto.

The GENIUS Act requires that all payment stablecoins must be backed by 100% US dollar cash or highly liquid assets such as short-term US Treasury bonds to ensure that users can redeem them at any time to prevent "de-anchoring" or bank runs. Algorithmic stablecoins usually have no real asset reserves, but rely on market mechanisms and codes to regulate supply and demand. This obviously does not meet the basic requirement of the GENIUS Act for "100% reserves". Therefore, algorithmic stablecoins are likely to be excluded from the scope of licensed issuance due to high risks, lack of real reserves, difficulty in auditing, and inability to regulate.

2.4 Interest-bearing stablecoins

Interest-bearing stablecoins are stablecoins that automatically generate income after users hold them. For example, USDe is issued by the Ethena protocol. After users buy or hold USDe, no additional operations are required, and the assets will continue to grow like "automatically profitable US dollars." The principle behind this is that the assets behind USDe will be used by the protocol to participate in DeFi lending, staking and other operations to earn interest, and then distribute part of the income to the holders.

However, the GENIUS Act clearly stipulates that "any licensed stablecoin issuer is prohibited from providing income or interest to users." In other words, stablecoins can only be used for payment and trading, and cannot make users make money like financial products. Therefore, interest-bearing stablecoins like USDe are difficult to obtain permission under the current regulatory framework in the United States.

2.5 Others

In addition to the above-mentioned types of stablecoins that are directly affected by the bill, other tracks may also be potentially affected by certain clauses.

The GENIUS Act requires stablecoin issuers to identify and verify user identities. In other words, all users must undergo identity authentication (KYC) before buying, selling or using stablecoins to prevent illegal activities such as money laundering and terrorist financing. At this time, projects such as on-chain KYC and identity verification (DID) can play an important role. They can provide a complete set of compliant identity identification tools for stablecoin projects. For example, after a user completes a KYC verification in an on-chain wallet, an on-chain identity certificate or pass can be generated for subsequent transaction authorization or compliance audit. For example, projects such as Fractal ID (Web 3 compliant identity authentication KYC/AML platform), Quadrata (on-chain identity passport protocol), and Civic Pass (an identity authentication system that provides on-chain access control) can help stablecoin issuers quickly identify whether users have passed KYC while protecting their privacy. Users do not need to upload their certificate information repeatedly every time, but use on-chain identity certificates to prove that they are compliant users, which is both safe and efficient. Another example is Worldcoin, which is supported by OpenAI co-founder Sam Altman. This is an on-chain identity authentication project. Users obtain a unique digital identity (World ID) through iris scanning to prove that they are "real humans" and solve the problem of identity proliferation in the AI ​​era. Unlike projects such as Fractal ID and Quadrata, Worldcoin emphasizes biometric technology and global layout, and is expected to become a key infrastructure in areas such as compliant access, anti-money laundering (AML) and qualified investor identification. At the same time, if the stablecoin project hopes to open services to institutions or large users in the future, on-chain KYC/DID can also support a whitelist mechanism. Only users who have completed KYC can participate in specific transactions, subscriptions, and enjoy higher quotas. In general, on-chain KYC and DID are like a stablecoin compliance pass system, which can help stablecoin projects continue to expand users and application scenarios while meeting regulatory requirements. In the context of gradually clear global policies, the value of this type of infrastructure may become increasingly greater.

In addition, in the summary of 2.4, we mentioned that the bill prohibits stablecoin issuers from providing income or interest to users, so interest-bearing stablecoins may be difficult to comply with. However, although the issuers of stablecoins (such as USDC or USDT) cannot pay interest directly to users, this does not mean that users cannot earn income through stablecoins. In fact, many third-party platforms or protocols can use these compliant stablecoins as tools to create income for users through investment, lending, arbitrage, etc. For example: Ethena is a synthetic stablecoin protocol based on Ethereum. It issues a stablecoin USDe anchored to $1 by building a hedging position of long spot assets and short perpetual contracts. When users deposit Ethereum or liquid pledged assets (such as stETH), the protocol will short perpetual contracts of equivalent value on centralized exchanges, thereby achieving a stable asset value close to the US dollar. Since shorting contracts will generate funding rates, and Ethereum spot itself may also carry pledge income (such as stETH), Ethena obtains stable profits through this funding spread. When users deposit USDe into the protocol, they will receive a profit certificate token sUSDe, which will automatically accumulate these arbitrage income over time, which is equivalent to an "interest-bearing version of USDe". Users holding sUSDe can continue to receive dividends from the Ethena protocol without any operation. It is worth noting that the income is not paid directly to USDe holders, but to users holding sUSDe. This design helps the protocol to avoid the restriction in the GENIUS Act that prohibits stablecoins from paying interest directly.

The stablecoin USDY launched by Ondo Finance, an RWA income project, is backed by short-term U.S. Treasury bonds and cash equivalents. Users use stablecoins (such as USDC) to purchase USDY, and the funds are used to invest in U.S. bonds off-chain. The interest income generated is indirectly reflected in the token value in the form of asset appreciation after Ondo settles off-chain. Note that the interest income generated by U.S. bonds here will not be directly distributed to users in the form of interest, but will be indirectly reflected by increasing the market value of USDY tokens. In other words, the USDY tokens held by users will appreciate as the income of the underlying assets grows, and users will gain income through the growth of token value. This method is different from the direct distribution of interest on the traditional DeFi protocol chain, and it also meets the compliance requirements of the GENIUS Act that prohibits stablecoin issuers from paying interest directly to users. Ondo also emphasized that USDY is not a stablecoin in the traditional sense, but a token with asset appreciation characteristics, which is closer to an investment product or security.

Decentralized lending protocols such as Aave and Compound allow users to deposit stablecoins (such as USDC, USDT) into the protocol, which then lends these stablecoins to borrowers, who pay interest, and depositors receive this part of the interest as income. The protocol maintains operations through the lending spread, that is, the interest rate paid by the borrower minus the interest rate paid to the depositor. Since users hold stablecoin assets, the income generated by deposits essentially comes from the interest share in lending activities. This income belongs to investment income rather than the interest paid directly by the stablecoin issuer, so it does not violate the provisions of the GENIUS Act that "stablecoin issuers are prohibited from paying interest to users." Subsequent compliant stablecoins can be considered as the underlying assets in the lending protocol. The stablecoin issuer ensures the currency value anchoring and compliant issuance, and the lending protocol uses these stablecoins for lending and matching to achieve asset flow and income generation.

There are also some yield aggregation and arbitrage strategy projects. Such protocols will use the stablecoins deposited by users to execute arbitrage strategies across multiple DeFi platforms, such as borrowing and lending between different lending protocols to earn interest rate spreads, participating in liquidity mining to get rewards, or capturing transaction fees. The protocol will return the income obtained to the user after deducting the fee, helping the user to realize asset appreciation. Yearn Finance is a yield aggregator protocol that automatically finds and executes the best DeFi yield strategy for users. Users deposit stablecoins (such as USDC, USDT, etc.) into Yearn's Vault, and the protocol will automatically allocate these funds to multiple DeFi platforms (such as Compound, Aave, Curve, etc.) to participate in lending, liquidity mining, arbitrage and other strategies. The generated income will continue to accumulate, and the value of the user's Vault share will increase accordingly. Users can redeem their shares at any time and obtain the principal plus the income generated by the strategy. Here, users hold Vault shares after the increase in income, not ordinary stablecoins, so its income comes from investment returns, not direct interest payments from stablecoin issuers, so it does not violate the regulations prohibiting stablecoins from paying interest.

As long as it does not trigger the regulatory red line, third-party DeFi protocols can use compliant stablecoins (such as USDC, PYUSD, FDUSD, EUROC) as underlying assets, generate income through DeFi lending, arbitrage, hedging, etc., and share the income with users, thus realizing "interest on deposits" in disguise. The GENIUS Act only prohibits stablecoin issuers from giving users interest directly, and does not prohibit other platforms from using compliant stablecoins as tools to design income products for users. Therefore, there is still a lot of room for imagination around the income innovation of compliant stablecoins.

3. Summary

The introduction of the GENIUS Act will profoundly reshape the entire stablecoin market landscape. It clarifies the compliance standards, which means that in the future, stablecoins such as USDC and PYUSD, which are issued by licensed institutions and have transparent asset reserves, will be more likely to gain the trust of users and institutions and be widely used in real scenarios such as payment and cross-border remittances. In contrast, stablecoins with unclear regulatory paths or difficulty meeting compliance requirements, such as USDT and DAI, may face the risk of restricted use, reduced liquidity, or even gradual marginalization in the US market.

At the same time, the implementation of the bill may also accelerate market integration and raise industry barriers. Some small or non-compliant issuers will find it difficult to survive, and inferior or high-risk stablecoins will face elimination. More importantly, the GENIUS Act emphasizes that stablecoins should serve payment and value transfer functions, rather than acting as financial products or speculative tools, which will guide the project back to its essential positioning as a "payment tool." Although the market may experience some fluctuations and adjustments in the short term, in the long run, this bill will help the stablecoin industry move towards a safer, more standardized and sustainable development path.