So, what is the Genius Act?

In my first post I raved about the Genius Act and how this article from the Economist persuaded me to start looking into stablecoins. But what is inside the Genius Act that made me change my mind? Three things:

• Reserve requirements: Stablecoin issuers are mandated to hold 1:1 reserves to all stablecoins they issue.

• Stablecoin issuer as financial institution: Stablecoin issuers are defined as financial institutions and therefore covered by the Bank Secrecy Act.

• Insolvency claims: In case of insolvency of a stablecoin issuer, consumers holding stablecoins from that issuer are given first priority.

The reserve requirements get specific. Every stablecoin needs 1:1 backing with highly liquid assets—U.S. coins, Central Bank deposits, and short-term Treasury securities. Foreign securities are off the table, though deposits at regulated foreign banks get a pass. The enforcement piece is where it gets serious: monthly audits from registered accounting firms, monthly public disclosures of what's actually in the reserves, and personal sign-off from the CEO and CFO. Misconduct in the disclosure process leads to criminal charges. Capital requirements will be set by regulators based on the issuer's size and risk profile, the details on this are expected shortly.

Stablecoin issuers are defined as financial institutions under the Bank Secrecy Act. That's the framework designed to combat money laundering and terrorist financing, so issuers are now fully inside the framework designed to prevent financial crime through the traditional financial institutions. Regulators will enforce operational, compliance, and IT risk management standards—with Bank Secrecy Act and sanctions compliance as non-negotiable requirements. The standards get tailored to each issuer's business model and risk profile, mirroring the room for manoeuvre given to regulators in setting capital requirements.

The consumer protection piece has teeth. The 1:1 reserves can't be pledged, rehypothecated, or otherwise reused—meaning they're actually sitting there for redemptions, not doing double duty elsewhere. Transparency is mandatory: public disclosure of redemption policies plus monthly reports on reserve composition, verified by registered accounting firms. If you're using a custodian for your stablecoins, that custodian has to segregate your assets—the coins, the private keys, the cash—and protect them from their own creditors. And here's the big one: if an issuer goes bust, stablecoin holders get first priority over everyone else in insolvency proceedings.

Now of course nothing is ever perfect and the devil is, as always, in the details. Capital requirements, while mandated in the Genius Act, are yet to be defined by the regulator and the regulation allows room for discretion in setting these requirements. Same with the definition of "appropriate standards" to comply with the Bank Secrecy Act. Such discretion might lead to another Silicon Valley Bank fiasco. We should have the capital requirements by mid January, which will allow us a first glimpse into what the future holds. Then there is of course, the question of stablecoin issuers falling under the state framework, rather than the federal one. With a threshold of 10B on capitalisation, lax state rules might still wreak havoc.

Even with these caveats, I do believe there are grounds enough for careful experimentation from current and future financial institutions without all exploding in our faces. For now.

Until next time,

Stable Sis