The GENIUS Act: A $250M Showdown with Bitcoin as the Last Stand

On July 18, the GENIUS Act officially became law, marking a pivotal moment in the regulation of stablecoins in the United States. This legislative action signifies a long-overdue recognition of the need to regulate stablecoins amid their increasing popularity and usage.

What lies ahead is a complex two-year rulemaking process that will shape the future of approximately $250 billion in existing stablecoins. The outcome of this process will determine whether these assets flow into bank-associated structures or disperse into offshore entities, and whether Bitcoin and Ethereum will emerge as beneficiaries or suffer under the weight of new regulations.

Justin Slaughter, the VP of regulatory affairs at Paradigm, emphasized the significance of these developments in a statement made on November 6:

“Little known fact—after the legislation is enacted, the real battle begins.”

Paradigm has recently submitted comments on the U.S. Treasury's advance notice of proposed rulemaking, highlighting the central issue at stake: whether affiliates of stablecoin issuers can provide yield to holders through separate financial products. Congress has already indicated that this practice is permissible, yet there is potential for the Treasury to challenge this conclusion.

The ability for stablecoin issuers to offer yield through wrappers is where the next regulatory confrontation will take place. If regulators succeed, stablecoins could be reduced to mere bank products. Conversely, if the industry prevails, it could lead to more competitive rates against traditional banking institutions.

Under the GENIUS Act, a regulatory framework will be established over the next three years, culminating in a mandatory compliance phase. The act will officially come into effect on January 18, 2027, or 120 days following the release of the final regulations, whichever arrives first.

Federal agencies have a one-year window from the enactment date to draft and publish these crucial regulations.

There will be a grace period lasting three years, expiring on July 18, 2028. After this date, U.S. exchanges, custodians, and most decentralized finance (DeFi) platforms will be prohibited from offering "payment stablecoins" unless they are issued by an authorized payment stablecoin issuer or a Treasury-approved foreign equivalent.

Issuers with a market cap under $10 billion have the option to operate under approved state regulations, while larger entities will be required to transition to federal oversight. Foreign issuers will have to secure determinations of a "comparable regime," obtain registration with the OCC, and maintain reserves held within the U.S.

This timeline indicates that regulators are expected to finalize their rulebook by early 2027. By mid-2028, any entity engaging with U.S. customers will need to either comply with these regulations or cease operations.

The GENIUS Act introduces a defined category known as "payment stablecoins," which restricts their distribution within the U.S. to coins issued by approved entities.

These approved issuers must be either bank subsidiaries, federally licensed nonbanks supervised by the OCC, or state-qualified organizations under stringent federal oversight.

Moreover, reserves must be maintained in cash, bank deposits, or Treasury bills, with a strict prohibition on rehypothecation. Issuers are also required to submit monthly disclosures and comply with comprehensive prudential supervision, as well as Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations.

This regulatory framework effectively pulls stablecoins into a banking-style perimeter without officially designating them as banks.

The implications for the $304 billion stablecoin market are significant, creating a bifurcation where liquidity connected to U.S. entities transitions into bank-like structures, while remaining assets are confined to offshore solutions.

While offshore issuers can operate globally, U.S. platforms are likely to avoid them to minimize liability risks. There is a staggering $300 billion at stake, divided between compliant entities and those that do not meet federal standards.

Slaughter's comments shine a light on the contentious issue of affiliate yield. While the GENIUS Act explicitly prohibits issuers from paying interest, it does not address the potential for affiliates to do so. Paradigm contends that forbidding affiliate yield would contradict the clear language of the statute.

This distinction is crucial because if affiliates are permitted to offer competitive rates, users could enjoy high-yield savings accounts with instant settlement capabilities. This scenario could revolutionize the landscape of stablecoin utilization.

As the regulatory landscape continues to evolve, the stakes remain high for all participants in the crypto space. The next few years will be critical in defining the future of stablecoins, Bitcoin, and the broader cryptocurrency market.