The Battle Between GENIUS and STABLE: Will Congress Stifle or Promote the Development of Stablecoins?

Original author: Leviathan News Translated by: LlamaC

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We are in a bull market - a bull market for stablecoins.

Since the collapse of FTX, the supply of stablecoins has doubled to $215 billion within 18 months, and this figure does not yet include the contributions from emerging crypto players such as Ondo, Usual, Frax, and Maker.

The current interest rate remains at a level of 4-5%, and the stablecoin industry has extremely considerable profits. Tether achieved an astonishing profit of 14 billion dollars (!) last year with fewer than 50 employees. Circle also plans to file for an IPO in 2025. Stablecoins are sweeping everything.

With Biden leaving office, stablecoin legislation is imperative by 2025. The banking industry watches as Tether and Circle seize a five-year head start to win the market. Once the new law is passed to legalize stablecoins, major banks across the U.S. will inevitably issue their own digital dollars.

Two important legislative proposals have currently entered the agenda: the "2025 U.S. Stablecoin National Innovation Act" (GENIUS Act) proposed by the Senate, and the "2025 Stablecoin Transparency and Ledger Economy Optimization Accountability Act" (STABLE Act) introduced by the House of Representatives.

These bills have been debated back and forth for a long time... However, we have finally reached an agreement, and one of them will be officially passed within the year.

The GENIUS Act and the STABLE Act both aim to establish a federal licensing framework for "payment stablecoin" issuers, set strict reserve requirements, and clarify regulatory responsibilities.

Payment stablecoins are simply a euphemism for fiat digital dollars issued by banks or non-bank institutions based on their own balance sheets. These digital assets are specifically used for payment settlements, with their value pegged to a fixed currency (usually tied to the US dollar at a 1:1 ratio), and supported by reserves of short-term government bonds or cash.

Opponents of stablecoins worry that they will undermine the government's control over monetary policy. It is recommended to read the authoritative work "Taming Wildcat Stablecoins" by Gorton and Zhang, which thoroughly analyzes these concerns.

The first iron law of modern dollars is to maintain the peg without decoupling.

The value of one dollar remains the same no matter where you are.

Whether deposited with JPMorgan, stored in Venmo or PayPal accounts, or used as credit points on the Roblox platform, any use involving US dollars must always comply with the following two rules:

• All US dollars must be freely exchangeable: there should be no mental accounting that divides dollars into "special", "reserve", or earmarked for specific purposes. Dollars held by JPMorgan should not be treated any differently than dollars on Tesla's balance sheet.
• The dollar is fungible: whether in cash, bank deposits, or reserves, all dollars have equal value in any scenario.

The entire fiat currency financial system is built on this core principle.

The core responsibility of the Federal Reserve is to maintain the stability and strength of the US dollar exchange rate, eliminating any risk of decoupling.

The above slide is from Zoltan Pozsar's "Principles of the Financial System's Operation." This authoritative guide on the U.S. dollar can help you gain a deeper understanding of the legislative intent behind these stablecoin bills.

Currently, all stablecoins are classified as private shadow currencies, located in the lower right corner of the classification chart. Even if companies like Tether or Circle were to go bankrupt or shut down, although it would deal a devastating blow to the cryptocurrency sector, the impact on the overall financial system would be almost negligible. Our daily lives would continue as usual.

Economists are concerned that if stablecoins are legalized, allowing banks to issue them and making them a public shadow currency, risks will arise as a result.

Because in the fiat currency system, the only key issue is who will be bailed out when a crisis occurs - as revealed in the slide above.

Do you remember the financial crisis of 2008? At that time, mortgage-backed securities in the United States accounted for only a tiny fraction of the global economy, yet the banking industry generally operated with nearly 100 times high leverage, and collateral circulated among the balance sheets of various institutions. When banks like Lehman Brothers collapsed, the combination of high leverage and the risk transmission mechanism of the balance sheet triggered a series of cascading collapses.

Global monetary institutions such as the Federal Reserve and the European Central Bank had to join forces to intervene in order to protect banks from the spillover of bad debt crises. Despite the rescue costing hundreds of billions of dollars, the banking industry ultimately managed to regain its footing. The Federal Reserve will always step in to save the banking system because once banks collapse, the global financial system will be paralyzed, and institutions with weak balance sheets may even face the risk of the dollar decoupling.

Similar cases can be found without tracing back to 2008.

In March 2023, Silicon Valley Bank collapsed spectacularly over a single weekend, triggered by a wave of withdrawals due to concentrated digital channel withdrawals and panic on social media. The bank's failure was not due to high-risk mortgage loans, financial derivatives, or cryptocurrency investments, but rather the significant depreciation of its "safe assets"—long-term U.S. Treasury bonds—as interest rates soared. Although Silicon Valley Bank was not large in the financial system, its collapse could trigger systemic risk, forcing the Federal Reserve, the Federal Deposit Insurance Corporation, and the Treasury to act urgently to provide full guarantees for all deposits (including those exceeding the standard insurance limit of $250,000). This rapid rescue operation revealed a profound lesson: when trust in dollar assets wavers, the entire financial system can collapse in an instant.

The collapse of SVB quickly affected the cryptocurrency market. At that time, Circle, the issuer of USDC, had a total circulation of about 30 billion dollars, most of its reserves were held at SVB. Over that weekend, USDC depegged by about 8 cents, briefly dropping to 0.92 dollars, triggering panic across the entire cryptocurrency market. Imagine if such a decoupling phenomenon occurred globally, the consequences would be unimaginable—this is precisely the potential risk posed by these new stablecoin regulations. Allowing banks to issue stablecoins themselves means that policymakers could embed volatile financial instruments deeper into the global financial system, and when the next financial crisis inevitably arrives, its destructive power will be amplified infinitely.

The core idea of the above slides is that once a financial crisis erupts, it ultimately requires government intervention to alleviate the situation and save the financial system.

The US dollars currently circulating in the market can be divided into several categories, each with different levels of security.

The US dollars directly issued by the government (i.e., M0 currency) enjoy the full credit endorsement of the US government and essentially carry no risk. However, as the monetary hierarchy extends into the banking system and is divided into M1, M2, and M3, the effectiveness of the government's guarantee diminishes step by step.

This is precisely the crux of the controversy surrounding the bank's relief measures.

Bank credit is the core of the American financial system; however, banks often pursue risk maximization within the legal framework, leading to excessively high leverage and a looming crisis. Once their risky behavior spirals out of control, it can trigger a financial crisis, at which point the Federal Reserve has to intervene to provide relief, in order to prevent the collapse of the entire financial system.

People are concerned that, since the vast majority of currencies today exist in the form of bank credit, coupled with the high interconnection and leverage among banks, if multiple banks were to fail simultaneously, it could trigger a chain reaction, impacting all industries and asset classes.

We witnessed this scene back in 2008.

Who would have thought that a seemingly partial part of the U.S. real estate market would shake the global economy? However, due to over-leverage and fragile balance sheets, the banking system is vulnerable when what was once considered safe collateral collapses.

This background explains why the legislation on stablecoins is constantly controversial and making slow progress.

Therefore, lawmakers have maintained a prudent attitude and clearly defined the qualification standards for stablecoins and their issuing entities.

This cautious attitude has given rise to two opposing legislative proposals: the GENIUS Act adopts a more flexible regulatory approach to stablecoin issuance, while the STABLE Act strictly limits the qualifications for issuance, interest payments, and issuer qualifications.

However, both of these bills mark significant progress and are expected to unlock trillions of dollars in funding potential for on-chain transactions.

Let us delve into these two bills to see what similarities and differences they have, and what the core controversy ultimately is.

The GENIUS Act: A Stablecoin Regulatory Framework Proposed by the U.S. Senate

The "GENIUS Act" (full title: "U.S. Stablecoin National Innovation Act"), introduced in 2025, was jointly proposed by Republican Senator Bill Hagerty of Tennessee along with bipartisan members Tim Scott, Kirsten Gillibrand, and Cynthia Lummis in February 2025.

On March 13, 2025, the bill was passed in the Senate Banking Committee with a result of 18 votes in favor and 6 votes against, becoming the first cryptocurrency-related bill to successfully pass.

The "GENIUS Act" defines stablecoins as a type of digital asset whose value is typically pegged to the US dollar at a 1:1 ratio, primarily designed for payment or settlement scenarios.

Despite the existence of other types of "stablecoins," such as the gold-backed PAXG issued by Paxos, tokens pegged to commodities like gold and oil are generally not within its regulatory scope according to the current draft of the GENIUS Act. The current version of the Act only targets stablecoins related to fiat currencies.

The tokens supported by the products are typically regulated under current laws by the CFTC or SEC based on their structure and use, rather than through legislation specifically targeting stablecoins.

If Bitcoin (BTC) or gold ever become mainstream payment currencies—like when we all move to a Bitcoin-funded utopia—this bill may apply; but for now, they are still not directly regulated under the "GENIUS Act."

This is a bill proposed by the Republican Party. Due to the refusal of the Biden administration and the Democratic Party to formulate any legislation regarding cryptocurrencies during the last administration, this proposal was born.

The bill establishes a federal licensing system, clearly stipulating that only authorized entities may issue payment stablecoins, and categorizes compliant issuing institutions into three types:

• Bank Subsidiary – Refers to a subsidiary under a deposit-taking institution (e.g., bank holding company) that may be specifically responsible for issuing stablecoins.
• Uninsured deposit institutions - These institutions may include trust companies or other state-chartered financial institutions that accept deposits but are not members of the Federal Deposit Insurance Corporation (FDIC) insurance (currently, many stablecoin issuers fall into this category).
• Non-bank entities - A new federal charter category established for stablecoins issued by non-bank institutions (sometimes referred to as "payment stablecoins" in the bill). These issuing institutions will be subject to federal charter approval and regulation by the Office of the Comptroller of the Currency (OCC).

It is not hard to imagine that all stablecoin issuers must hold high-quality liquid assets such as cash, bank deposits, or short-term U.S. Treasury bills as full 1:1 reserves. At the same time, these institutions are also required to regularly disclose their reserve status and undergo audits by licensed accounting firms to ensure operational transparency.

A major highlight of the GENIUS Act is its dual regulatory framework: for small issuers of circulating stablecoins with a market cap of less than $10 billion, as long as the regulatory standards of their state are not lower than federal guidelines, they can continue to be regulated by state-level agencies.

Wyoming has become the first state in the United States to attempt to issue a stablecoin regulated by state law.

Large issuing institutions must accept direct federal oversight, primarily under the jurisdiction of the Office of the Comptroller of the Currency (OCC) or relevant federal banking regulatory agencies.

It is worth noting that the "GENIUS Act" clearly stipulates that compliant stablecoins do not fall under the category of securities or commodities. This move not only clarifies the division of regulatory responsibilities but also dispels market concerns about the SEC (Securities and Exchange Commission) or CFTC (Commodity Futures Trading Commission) intervening in regulation.

Critics have previously argued for the inclusion of stablecoins under securities regulation, as obtaining a securities identity would mean that their issuance and circulation would be more convenient and widespread.

"The STABLE Act: House Rules"

In March 2025, U.S. Representatives Bryan Steil (Republican-Wisconsin) and French Hill (Republican-Arkansas) jointly introduced the "Stablecoin Transparency and Ledger Economy Optimization Responsibility Act" (STABLE Act). Although the bill is highly similar to the GENIUS Act, it adds a unique financial risk prevention and control mechanism.

Importantly, the bill explicitly prohibits stablecoin issuers from providing interest or yields to holders, ensuring that stablecoins are used solely as cash substitutes for payment, rather than as investment products.

In addition, the "STABLE Act" stipulates that the issuance of new algorithmic stablecoins (i.e., stablecoins that rely entirely on digital assets or algorithms to maintain their peg) shall be suspended for a period of two years until further regulatory assessments are completed and corresponding safeguards are established.

Two bills sharing the same legal basis

Although there are some differences, the GENIUS Act and the STABLE Act demonstrate significant consensus, reflecting a broad agreement between the two parties on the foundational principles of stablecoin regulation. The core consensus of the two bills is mainly reflected in:

• The issuer of stablecoins must obtain strict licensing to enhance regulatory compliance.
• It is stipulated that stablecoins must be fully backed 1:1 by highly liquid, low-risk reserve assets to mitigate solvency risk.
• Implement strict transparency requirements, including regular public information disclosures and independent audits.
• Establish a clear consumer protection mechanism, focusing on asset segregation measures and priority repayment rights in the event of the issuer's bankruptcy.
• By clearly defining stablecoins as neither securities nor commodities, provide a clear basis for regulation, thereby optimizing jurisdiction and oversight processes.

Although the fundamental principles are the same, the GENIUS Act and the STABLE Act have significant differences in three key points.

• Interest Payment Terms: The GENIUS Act supports stablecoins providing interest or returns to holders, which opens up space for financial innovation and expands the application scenarios for stablecoins. In contrast, the STABLE Act explicitly prohibits interest payments and strictly limits stablecoins to being used solely as payment tools, without any investment or interest-bearing capabilities.
• Algorithmic Stablecoins: The GENIUS Act takes a cautiously open approach, requiring regulatory agencies to closely study and monitor such stablecoins rather than implementing a direct and comprehensive ban. In contrast, the STABLE Act clearly stipulates a two-year suspension on the issuance of new algorithmic stablecoins, a stringent measure stemming from heightened vigilance over past market crash events.
• Differences between state and federal regulatory standards: The "GENIUS Act" clearly stipulates that when the issuance scale of stablecoins reaches $10 billion, the issuer must transition from state-level regulation to federal regulation, thereby clearly defining its systemic importance. Although the "STABLE Act" recognizes similar standards, it does not set a specific numerical threshold, allowing regulatory agencies the flexibility to adjust according to market changes.

Why No Interest? An Analysis of the Stablecoin Yield Ban

A notable provision in the "STABLE Act" proposed by the House of Representatives (and previous related proposals) is to prohibit stablecoin issuers from paying interest or any other form of yield to holders.

In fact, this means that compliant payment-type stablecoins must operate like digital cash or stored value instruments—holding 1 stablecoin can be exchanged for 1 dollar at any time, but it will not generate additional returns over time.

This stands in stark contrast to other financial products that may generate interest, such as bank savings, or products that can generate returns, like money market funds.

Why should such restrictions be implemented?

The establishment of the "no-interest rule" has multiple legal and regulatory foundations, rooted in U.S. securities regulations, banking laws, and related regulatory guidelines.

Avoiding Securities Qualification

One of the main reasons for prohibiting interest payments is to avoid stablecoins being classified as investment securities under the Howey Test.

However, when the issuer starts providing returns (for example, a stablecoin pays a 4% annualized return through reserves), users will expect to profit from the issuer's operations (the issuer is likely generating this return by investing the reserves). This situation may trigger the Howey test, leading the U.S. Securities and Exchange Commission to classify the stablecoin as a security offering.

In fact, former SEC Chairman Gary Gensler has suggested that some stablecoins may be classified as securities, especially those that mimic shares of money market funds or have profit characteristics. To this end, the drafters of the STABLE Act explicitly prohibit the issuance of interest or dividends to coin holders, thereby eliminating any profit expectations—ensuring that stablecoins are used solely as payment instruments, rather than investment contracts. Through this measure, Congress has clearly classified regulated stablecoins as a non-security category, as stated in the two pieces of legislation.

But the problem with this ban is that interest-bearing stablecoins like Sky's sUSDS and Frax's sfrxUSD already exist on-chain. Prohibiting interest payments will only create unnecessary obstacles for companies looking to experiment with different business models and stablecoin systems.

Maintain the boundary between banking and non-banking industries

The U.S. banking law has traditionally classified deposit-taking activities as the exclusive domain of banks (and savings institutions/credit unions). (Deposits are classified as securities products.)

The Bank Holding Company Act (BHCA) promulgated in 1956 and its accompanying regulations clearly stipulate that commercial enterprises are not allowed to accept deposits from the public. To engage in deposit-taking activities, the entity must be a regulated banking institution; otherwise, it will be treated as a bank and face comprehensive regulatory requirements.

The financial instruments in which customers hand over US dollars to your side with an agreement for interest-bearing repayment essentially belong to the nature of deposits or investment notes.

Regulators have stated that if the functionality of stablecoins is too similar to bank deposits, they may be subject to relevant legal constraints.

The STABLE Act prohibits interest payments with the intention of preventing stablecoins from masquerading as uninsured bank accounts. Such tokens will be classified as stored value cards or prepaid balances - according to current regulations, non-bank institutions can issue such products when certain conditions are met.

As a legal expert said, companies should not be able to circumvent the compliance requirements of the Federal Deposit Insurance Act and the Bank Holding Company Act simply by packaging their deposit-taking activities as stablecoins.

In fact, if stablecoin issuers are allowed to pay interest, they may compete with banks for deposit-like funds (but lack equivalent safeguards such as FDIC insurance or Federal Reserve oversight), which is likely to be viewed as unacceptable behavior by banking regulators.

It is worth noting that the stability of the US dollar and the financial system relies entirely on the credit capacity of banks— including the issuance of mortgage loans, commercial loans, and other trade-related debts, which are often accompanied by extremely high leverage, while retail deposits are used as a crucial backing to support their reserve requirements.

JP Koning's views on PayPal's dollar are very enlightening and closely related to the current discussion. Currently, PayPal actually offers two different forms of dollar services.

One is the conventional PayPal balance you are familiar with—this type of funds is stored in USD in a traditional centralized database. The other is the new cryptocurrency dollar PayPal USD, which operates on blockchain technology.

You might think that traditional methods are safer, but surprisingly, the cryptocurrency version of the US dollar launched by PayPal is actually more secure and offers consumers more comprehensive protection.

The reason is that the ordinary US dollars in a PayPal account may not be backed by the safest assets.

According to PayPal's public disclosure documents, only about 30% of its customer funds are allocated to cash or top-tier safe assets like U.S. Treasury securities, while nearly 70% of the funds are invested in higher-risk, longer-term asset classes such as corporate bonds and commercial paper.

What is even more unsettling is that, strictly speaking from a legal standpoint, these traditional account balances do not actually belong to you.

If PayPal goes bankrupt, you will become an unsecured creditor and need to pursue the debts together with other creditors; being able to recover the full amount will be considered fortunate.

In contrast, the cryptocurrency version of PayPal USD must strictly comply with the regulations of the New York State Department of Financial Services, and its value must be fully backed by cash equivalents and ultra-safe short-term assets such as U.S. Treasury securities.

This stablecoin not only has safer asset reserves, but the ownership of the cryptocurrency balance is clearly attributed to the user: the relevant reserves must be legally held in the name of the holder's interests. This means that even if PayPal goes bankrupt, you will be prioritized over other creditors for the return of funds.

This difference is crucial, especially when considering overall financial stability. Stablecoins like PayPal USD are not affected by the balance sheet risks, leverage effects, or collateral issues that are prevalent in the banking system.

When a financial crisis erupts - precisely when people need to hedge the most - investors may flock to stablecoins, precisely because they are completely uninvolved with the high-risk lending practices of banks or the instability of the fractional reserve system. Ironically, the role that stablecoins may ultimately play is more akin to a safe haven, rather than the high-risk speculative tools that the public generally perceives them to be.

This is undoubtedly catastrophic for the banking system. By 2025, capital flows have synchronized with the internet. The collapse of Silicon Valley Bank (SVB) was exacerbated by panicked investors quickly withdrawing funds through digital channels, leading to a chain reaction that continuously worsened and ultimately resulted in its complete collapse.

Stablecoins are a superior form of currency, which banks are deeply afraid of.

The compromise of these bills is that as long as the dollar tokens issued by non-bank institutions do not involve interest payment functions, they can be allowed to be issued—thus avoiding direct encroachment on the business area of bank interest-bearing accounts.

This delineates clear boundaries: banks are responsible for accepting deposits and issuing loans (and can also pay interest), while the bill stipulates that stablecoin issuers need only hold reserves and process payments (they are not permitted to engage in lending activities and do not pay interest).

This is essentially a modern interpretation of the concept of "narrow banking"; the function of stablecoin issuers is similar to that of a 100% reserve bank, and they should not engage in maturity transformation or provide interest returns.

Historical Comparison (Glass-Steagall Act vs Q Regulation)

The Glass-Steagall Act, enacted in 1933, is known for separating commercial banking from investment banking. At the same time, the Q regulation prohibited banks from paying interest on demand deposit accounts (i.e., checking accounts) for several decades. The original intention of this policy was to curb vicious competition among banks for deposits and maintain the stability of the financial system (excessive risk-taking behavior due to high-interest deposit competition in the 1920s had led to the bankruptcy of several banks).

Although the ban of Reg Q was gradually abolished (completely lifted in 2011), its core idea is that the funds used for daily transactional liquidity should not serve the dual purpose of earning interest as an investment.

The design of stablecoins is essentially to serve as a highly liquid transaction balance—similar to demand deposits or cash in traditional finance. The practice of legislators banning interest-bearing stablecoins continues this traditional concept: ensuring that payment instruments are simple and safe, and clearly distinguishing them from investment products that have income-generating attributes.

This approach can also prevent the formation of a shadow banking system similar to that of unregulated entities (see previous discussion on Pozsar's viewpoint, noting that private shadow banks generally cannot access bailout assistance).

If the issuer of stablecoins provides interest income, its operating model is essentially equivalent to that of a bank—absorbing funds and earning interest through investments in government bonds or issuing loans.

However, unlike banks, the borrowing and investment activities of stablecoin issuers are not subject to other regulatory constraints, aside from compliance with reserve requirements. Users may mistakenly perceive it as safe as bank deposits, without realizing the potential risks.

Regulators are concerned that this could trigger a "run risk" during a crisis—if the public mistakenly views stablecoins as safe as bank accounts, any fluctuations in their value could lead to large-scale concentrated redemptions, further exacerbating overall market pressure.

Therefore, the no-interest rule requires stablecoin issuers to hold reserves but prohibits them from seeking yields through borrowing or risky investments, significantly reducing the risk of a bank run (as reserves are always equal to liabilities).

This definition protects the stability of the financial system by preventing large amounts of funds from flowing into unregulated quasi-banking financial instruments.

Effectiveness, Practical Value, and Influence

The direct impact of this bill is to fully integrate stablecoins into the regulatory framework, which is expected to enhance their security and transparency.

Currently, stablecoin issuers such as Circle (USDC) and Paxos (PayPal USD) voluntarily comply with strict state-level regulatory requirements, particularly New York's trust framework system, but there is still no unified standard at the federal level.

These new regulations will establish unified national standards to ensure that each stablecoin is fully backed 1:1 by high-quality assets such as cash or short-term government bonds, thereby providing greater protection for consumers.

This is a significant victory: this move enhances trust, making stablecoins safer and more reliable, especially after widely publicized crisis events such as the UST collapse and the SVB failure.

In addition, by clearly stating that compliant stablecoins do not fall under the category of securities, the ongoing threat of regulatory raids by the U.S. Securities and Exchange Commission (SEC) is eliminated, thereby transferring regulatory responsibilities to more appropriate financial stability regulatory agencies.

In terms of innovation, the progress of these bills is surprising.

Unlike earlier strict proposals (such as the initial version of the STABLE draft in 2020 that mandated issuance only by banks), these new proposals open pathways for fintech companies and even large tech firms—they can issue stablecoins by obtaining federal charters or partnering with banks.

Imagine companies like Amazon, Walmart, and even Google issuing their own branded stablecoins and achieving widespread circulation within their vast ecosystems.

In 2021, when Facebook attempted to launch Libra, it was truly visionary. In the future, every company may issue its own brand tokens, and even influencers and ordinary individuals might have their own digital currencies...

Would you consider buying Elon Coin or Trump Coin?

Count us in.

However, these bills also come with significant trade-offs.

No one can predict where decentralized stablecoins will end up. It is questionable whether they can effectively manage capital reserves, pay licensing fees, conduct ongoing audits, and incur other compliance costs. This situation could inadvertently give large incumbents like Circle and Paxos an advantage, while squeezing smaller or decentralized innovators out of the market.

What will DAI face? If it fails to obtain a license, it may be forced to exit the U.S. market. The same goes for Ondo, Frax, and Usual, as these projects currently do not meet regulatory requirements. We may witness significant reshuffling in the industry in the second half of this year.

Conclusion

The United States' push for stablecoin legislation fully demonstrates the significant progress made in related discussions over the past few years.

What was once considered marginal has now stood at the forefront of a new financial revolution. Although it comes with strict conditions, it is about to receive formal recognition from official regulation.

We have made significant progress, and these bills will promote a new wave of stablecoin issuance.

The "GENIUS Act" tends to allow market innovation within a regulatory framework (such as interest mechanisms or new technology applications), while the "STABLE Act" takes a more cautious approach towards these areas.

As the legislative process progresses, these differences must be reconciled. However, given the bipartisan support and the Trump administration's public desire to push the bill through by the end of 2025, one of the proposals will eventually become law.

This is a joint victory for our industry and the US dollar.