The GENIUS Act, which was enacted on July 18, aims to provide a safe and regulated environment for dollar-pegged stablecoins while ensuring swift transaction processing. It focuses issuers on US Treasury bills and cash, potentially creating a new demand for US government debt.
Supporters laud it for bringing legal structure and consumer safeguards, while critics suggest it presents a significant concern: Will stablecoin issuers transform into involuntary purchasers of US debt? Shanaka Anslem Perera argues that the GENIUS Act results in each digital dollar minted becoming a mandated investment in US sovereign bonds.
Key Elements of the GENIUS Act
The Act introduces the definition of ‘payment stablecoins’ as fiat-associated tokens primarily for transactions. Only authorized issuers can cater to US users, and they must ensure their tokens are fully backed at a 1:1 ratio with a select group of high-quality assets, including:
- US coins and currency
- Federal Reserve balances
- Insured bank deposits
- Short-maturity Treasurys
- Approved government money market funds
- Regulated overnight repos with Treasurys
Issuers are required to maintain transparency through regular reserve disclosures and audited financials, strictly focusing on activities associated with stablecoin issuance rather than broader financial operations.
Foreign issuers must either meet US regulatory standards or show that their country’s regulations are comparable.
Challenges for Regulators
Though the GENIUS Act appears to set the stage for clear guidelines, analysts from Brookings have raised concerns regarding the implications of uninsured bank deposits and the complexities that large public firms might introduce as stablecoin issuers. Questions also linger about the actual capability of such issuers to comply with anti-money laundering (AML) and counter-terrorist financing (CFT) regulations.
Are Issuers Stealth Buyers of US Debt?
Perera elaborates that the GENIUS framework could mold stablecoin issuers into niche banks primarily converting global demand for digital dollars into a consistent appetite for US Treasury bonds, leading to a situation where:
“The United States Treasury has executed a structural transformation of American monetary architecture that bypasses the Federal Reserve…”
With required deposits allocated to safe government securities and stringent regulations preventing broad lending, issuers may naturally accumulate large holdings of Treasury bills. As a result, companies like Circle and Tether serve as conduits, housing inflows from investors in inflation-stricken regions in short-term US securities, leading to a cycle of government funding at lower costs.
Implications of Market Fluctuations
Perera warns that the same mechanisms that bolster demand for T-bills could also lead to heightened volatility. As stablecoin markets experience outflows, Treasurys could flood the market, potentially prompting a renewed debate on central bank digital currencies (CBDCs) if significant strain arises in the stablecoin sector.
When a stablecoin crisis transpires, it could incite a shift in political sentiment toward advocating a digital dollar to alleviate counterparty risks.
In conclusion, while the GENIUS Act could foster a regulated space for stablecoins under federal oversight, it intertwines fiscal strategies with the global demand for digital currencies, laying the groundwork for future discussions about the control dynamics of monetary systems.
