The "GENIUS Act" and stablecoins: A new investment blue ocean under regulation

Written by: James Lavish

Compiled: Vernacular Blockchain

There is an increasing number of voices that believe "stablecoins are the future of crypto assets."

For example, officials from the U.S. Treasury and possibly central bankers.

But what exactly are stablecoins? Why are they so important? What issues do they solve for investors and the U.S. Treasury?

In simple terms, stablecoins

In simple terms, a stablecoin is a type of digital asset (cryptocurrency) designed to maintain a stable value.

How to achieve it?

By pegging its price to a reference asset, such as fiat currency, gold, or even a basket of assets.

The goal of stablecoin issuers is to combine the trading advantages of cryptocurrencies—fast settlement, programmability, and global accessibility—with the "price stability" of fiat currencies.

Before we dive deeper, let's take a look at several types of stablecoins available on the market:

Fiat-backed stablecoins: The goal is to maintain a 1:1 peg with a certain national currency (such as the US dollar), commonly seen with USDT (Tether) and USDC (USD Coin).

Asset-backed stablecoins: Pegged to physical assets, such as gold (e.g., PAXG, backed by physical gold reserves).

Collateralized Stablecoins: These are backed by volatile cryptocurrencies as collateral and use over-collateralization to manage price fluctuations.

Algorithmic stablecoin: Maintains price peg through supply and demand algorithms, rather than actual physical reserves. (For example, the disastrous TerraUSD (UST) in 2022 is a typical failure case of algorithmic stablecoins.)

Today we will focus on dollar-pegged stablecoins, as well as the initiatives surrounding them from the U.S. Treasury and federal regulators.

Dollar-pegged stablecoins are primarily used as digital cash within cryptocurrency trading platforms and ecosystems. They play a key role in trading, lending, decentralized finance (DeFi) applications, and cross-border payments.

Stablecoins like USDT and USDC are used by traders to transfer funds between exchanges or to temporarily hold assets during market uncertainty.

Unlike traditional banks, which are limited by operating hours, liquidity constraints, and regulatory challenges, USD stablecoins offer real-time settlement, global accessibility, and integration with smart contracts.

This makes them almost indispensable in the 24/7 open cryptocurrency market.

But how reliable are they?

This raises the issue of auditing, which is used to verify the underlying assets of stablecoins.

Circle has publicly disclosed proof documents confirming that each USDC token is backed by a 1:1 ratio of liquid dollar assets, including cash and short-term U.S. Treasury bills. USDC is audited monthly by Grant Thornton LLP, making its transparency in the stablecoin space the gold standard.

Tether (USDT) has been criticized for its lack of transparency and past contradictory information. Although it now publishes quarterly attestations and promises comprehensive audits, its reserves include less liquid assets such as commercial paper. In 2021, Tether was fined $41 million by the Commodity Futures Trading Commission (CFTC) for falsely representing its reserves. Nevertheless, USDT remains the largest stablecoin by trading volume globally, although its reputational risks are slightly higher.

So, what happens when investors have concerns about the underlying assets and stability of stablecoins?

Stablecoins can "depeg," meaning they deviate from the value of the currency they are pegged to.

For example, when Silicon Valley Bank collapsed, USDC fell from $1 (pegged to the US dollar) to $0.87, as investors were concerned about USDC's exposure at the bank.

USDC and the Collapse of Silicon Valley Bank:

As of early March 2023, Circle has approximately $40 billion in USDC reserves.

Of the total, 3.3 billion USD (approximately 8.25%) is held in cash deposits at Silicon Valley Bank.

When Silicon Valley Bank collapsed and was taken over by the Federal Deposit Insurance Corporation (FDIC), the market was concerned that Circle might not be able to access these funds immediately or in full.

This panic caused USDC to temporarily depeg, dropping to $0.87 on some exchanges, until the U.S. government intervened to guarantee deposits at Silicon Valley Bank, after which it recovered to $1.

For holders, this means that if you hold 100,000 USDC, its value was once only 87,000 until the government intervened to guarantee deposits, after which the peg was restored to 1 dollar.

Since then, the stablecoin market has continued to thrive, with its importance and scale steadily increasing, and the total market capitalization of USDT and USDC has now reached 214 billion dollars.

This has not gone unnoticed. With this growth, the U.S. Treasury now views dollar stablecoins as a strategic extension of the dollar's influence.

In short, the Treasury needs stablecoins.

Why does the U.S. Treasury need stablecoins

In simple terms, stablecoins can facilitate the global use of the US dollar, thereby increasing demand for US Treasury bonds.

Dollar-pegged stablecoins (such as USDC and USDT) serve as a digital version of the dollar, usable globally with just a smartphone and an internet connection.

This extends the influence of the dollar to areas without a sound banking system.

In fact, stablecoins serve as permissionless on-chain dollars, enabling global users to store value, conduct cross-border transactions, and hedge against local currency risks.

This widespread demand solidifies the status of the US dollar as the world's reserve currency.

Circle CEO Jeremy Allaire once stated, "USDC performs the functions of the dollar better than many banks overseas."

This is great, it helps the US dollar to be used globally, even benefiting people in remote areas without bank accounts.

But how does this help the U.S. Treasury?

The answer is simple.

In order to maintain a 1:1 peg, stablecoins must be backed by high-quality liquid assets. For most major issuers, this means primarily holding a specific type of security.

That's right, it's U.S. Treasury bonds.

According to Tether's press release on May 1: "Tether... has reached a historical high in total exposure to U.S. Treasury bonds, approaching $120 billion, including indirect exposure to Treasury bonds through money market funds and reverse repurchase agreements."

This has made Tether rank among the holders of U.S. Treasury securities:

In fact, Tether holds more government bonds than Germany and the UAE. How did they reach this scale so quickly?

Last year, Tether was one of the top ten buyers of U.S. Treasury bonds, increasing its holdings by $33.1 billion, becoming the seventh largest net buyer, following the UK and ahead of Canada.

Don't forget about USDC. Although its market capitalization is relatively small, USDC reports that over 75% of its reserves are invested in U.S. government debt (short-term Treasury bills) with a maturity of three months or less, while the remainder is held in cash at major banks.

The overall demand from these issuers is now comparable to that of some medium-sized sovereign countries.

In a world where deficits are rising and government debt issuance is increasing, this demand is a welcome "lifeline" for Washington.

This new demand for government bonds from non-sovereign entities is reshaping the traditional debt market:

Stablecoin reserves serve as a balance sheet seeking yield, tending to invest in safe assets such as short-term government bonds.

Unlike traditional banks, these issuers are not subject to Basel capital requirements or deposit insurance rules, which restrict the size of the balance sheet.

For example, Tether reported a net profit of over $13 billion in 2024, mainly from the interest on its treasury investment portfolio (while the company has only about 100 employees).

Although this demand is crucial for the U.S. Treasury to sell a large amount of debt, it also brings about concentration risks and raises questions regarding transparency, redemption processes, and systemic risks.

We have seen this in the USDC and Silicon Valley Bank events. Although the peg quickly recovered after federal government intervention, this incident demonstrates that confidence can evaporate rapidly.

If USDT or USDC experiences a redemption run, it could force the rapid liquidation of hundreds of billions of dollars in government bonds. This will impact the global repurchase market and short-term financing instruments.

As a result, regulators—from the Treasury Department to the Financial Stability Oversight Council—view stablecoins not only as technological and financial innovations but also as emerging systemically important entities.

By anchoring to U.S. Treasuries, stablecoins have become buyers and amplifiers of the dollar's dominance. In this process, they... uh, have bound the full power of U.S. fiscal and regulatory forces.

This leads to the "GENIUS Act."

The "GENIUS Act" Washington has joined the discussion

Recognizing that stablecoins are no longer a marginal cryptocurrency concept, but a major player in the global liquidity and debt markets, policymakers have intervened with what they call "responsible innovation."

This is the "GENIUS Act."

The full name of the bill is the "Guiding and Ensuring National Innovation for US Stablecoins Act," proposed by Senators Bill Hagerty (Republican - Tennessee) and Kirsten Gillibrand (Democrat - New York). It is a bipartisan legislative proposal.

Some key provisions of the bill:

Federal License: Issuers with a circulation exceeding $10 billion must obtain a federal license and be subject to regulation.

Full reserve backing: Stablecoins must be backed 1:1 by high-quality liquid assets such as U.S. Treasury bonds and cash.

Mandatory Audit: Issuers are required to undergo independent audits regularly and disclose reserve data (Tether, you should pay attention).

Dual-track regulation: Small issuers with a circulation of less than 10 billion dollars can operate under state-level supervision, maintaining the openness of the ecosystem to startups.

CBDC Alternatives: The bill explicitly supports private sector dollar stablecoins as an alternative to central bank digital currencies (CBDCs).

What is the current legislative progress of the bill?

The "GENIUS Act" was passed by the U.S. Senate last week (May 19) with a bipartisan vote of 66 to 32. But of course, not everyone is in support.

Senator Elizabeth Warren has become one of the most vocal and strident critics of the bill, warning that the GENIUS Act may lack sufficient consumer protections and could disproportionately benefit private crypto interests.

Warren has long argued that if the U.S. is to issue a digital dollar, it should be issued and controlled by the public sector, possibly in the form of a central bank digital currency (CBDC), to better ensure consumer protection, financial stability, and minimize environmental impact.

However, CBDC gives governments and banks absolute monitoring and control over every penny you have, down to every transaction.

even have the ability to refuse any or all transactions, as well as freeze or confiscate all of your funds.

In any case, I think it is unlikely that CBDC will be created and used in the United States in the short term.

Back to the "GENIUS Act."

The bill will next be submitted to the House for consideration. Although it has received strong bipartisan support in the Senate, the path in the House seems more complicated.

Some House Republicans have introduced competing versions of stablecoin legislation, with key differences surrounding state regulatory authority, the role of the Federal Reserve, and the allocation of control between federal and state agencies.

At the same time, some House Democrats and Senator Warren agree that the bill may favor crypto insiders and lacks the consumer protection measures needed to prevent abuse or systemic risks.

Therefore, although the momentum of the "GENIUS Act" is strong, it is far from a done deal. More debates, negotiations, and possible amendments are expected before it reaches the President's desk.

Washington is essentially saying: Well, stablecoins have taken root - we urgently need them to support the future unlimited issuance of U.S. Treasury bonds - but we will ensure they are safe, sound, and structured.

Summary

Regardless, I believe that stablecoins will exist in the long term, the "GENIUS Act" will ultimately be signed into law, providing a framework for stablecoins - this will only further solidify their position on the list of U.S. Treasury bondholders.

I expect that in the near future, USDT and/or USDC will top the list. The largest holders of US Treasury bonds in the world.