The Basics: Stablecoins and The GENIUS Act

What is a stablecoin, and why should I care?

A stablecoin is a type of cryptocurrency designed to maintain a fixed value—most often pegged to the U.S. dollar—by being backed 1:1 with reserves. Think of it as a digital IOU: for every $1-pegged coin in circulation, the issuer holds $1 in safe, highly liquid assets.

You should care because stablecoins make dollars programmable, instantly transferable worldwide, and usable in digital ecosystems without going through traditional payment rails. If you are considering being an issuer, it represents a new way for you to participate in payments, settlements, and financial innovation, which could potentially open new revenue streams, strengthen customer engagement, and position your organization favorably in a rapidly growing digital asset market.

What are the key features of a stablecoin?

There are five fundamental characteristics that are critical to understanding the nature of a stablecoin as a digital asset:

1. Pegged Value: The most common stablecoins promise that 1 coin = $1.
2. Blockchain-Based: Stablecoins live on public or private blockchains, meaning they can be sent globally in seconds, 24/7.
3. Fully-Backed Reserves: The peg is maintained because each coin is supported by cash or cash-equivalent reserves.
4. Redemption Right: A holder can, at any time, return the coin to the issuer and get $1 back (at “par”).
5. Two Pricing Tracks:
   1. Issuer Redemption Price: Always $1 if the issuer is solvent and compliant.
   2. Market Price: The coin may trade above/below $1 in secondary markets due to liquidity, access, or panic. A “failed peg” occurs when the market price drifts significantly from $1.

What is a “peg” and how do reserves work?

In stablecoin terms, the “peg” is the promise that each coin will always be worth a fixed amount of currency (usually $1). That peg is what gives the stablecoin its “stable” part, as opposed to the price swings you see in Bitcoin or Ethereum.

Reserves are what make the peg believable. For every $1-pegged coin issued, the issuer must hold $1 in safe, highly liquid assets such as cash in a bank account or short-term U.S. Treasuries. Those reserves are held separately from the issuer’s other funds and can’t be used for unrelated purposes.

Here’s how it works in practice:

• You buy a stablecoin directly from the issuer.
• Your $1 goes into a reserve pool.
• When you redeem the coin, the issuer takes $1 out of reserves and sends it back to you.
• If the reserves are always intact and redemption happens promptly, the peg holds.
• If reserves are lacking or redemption stalls, confidence drops and the market price can dip below $1, even if the issuer still claims the peg.

Why do stablecoins exist when we already have things called “dollars”?

Four reasons:

1. Speed: Stablecoins are able to be settled instantly, as compared to the several minutes or hours needed for bank wires, or in the case of Automated Clearing House (ACH) transfers, days.
2. Availability: As a digital asset, stablecoin can operate outside of bank hours and across borders, eliminating the need to wait until the next business day to transact.
3. Programmability: Stablecoin integrates with smart contracts within the broader, existing digital asset ecosystem.
4. Liquidity in Digital Markets: Stablecoin is liquid. It can facilitate trading, lending, and settlement unilaterally in cryptocurrency environments without converting back to traditional government-issued currency, known as fiat currency.

Keep in mind that one critical difference between stablecoins and dollars is that unlike cash deposits, payment stablecoins are not insured by the federal government.

What is the GENIUS Act?

The Guiding and Establishing National Innovation for U.S. Stablecoins Act of 2025 (the “GENIUS Act”) is the first U.S. federal law specifically regulating “payment stablecoins.” A payment stablecoin is a digital asset that is designed to be used for payments and pegged to a fiat currency (e.g., the U.S. Dollar). Only certain approved entities, or “permitted payment stablecoin issuers,” can issue these tokens. Stablecoins not issued by permitted issuers are ineligible for treatment as cash or cash equivalents for accounting, margin, or settlement purposes in regulated financial markets.

Digital assets that are also national currencies, deposits, or securities under the federal securities laws are not eligible to be payment stablecoins under the GENIUS Act. In other words, the GENIUS Act makes it clear that a payment stablecoin won’t be treated as a security or commodity under federal law. This means less regulatory overlap and more clarity for your business.

Who is eligible to be an issuer?

Only three categories of businesses may issue stablecoin:

1. Subsidiaries of insured banks. A subsidiary of an insured depository institution may issue payment stablecoins after receiving approval from the insured depository institution’s appropriate federal banking agency.
2. Federal-qualified non-bank issuers. A non-bank entity, uninsured national bank, or federal branch of a foreign bank can also can issue stablecoin, but it must receive pre-approval to do so by the Office of the Comptroller of the Currency (“OCC”).
3. State-qualified issuers. Issuers that have been approved to issue stablecoins by state stablecoin regulators and which don’t qualify as under the other two categories above.

Public companies who do not engage primarily in financial activities generally cannot issue a payment stablecoin unless the Stablecoin Certification Review Committee (the “SCRC”), an oversight body consisting of the Secretary of the Treasury, the Chair of the Board of Governors of the Federal Reserve System, and the Chair of the Federal Deposit Insurance Corporation, unanimously find that the company will not pose a material risk to the U.S. financial and banking system and the company agrees to adopt certain data use and privacy measures.

What obligations does an issuer have under the GENIUS Act?

Under the Genius Act, an issuer of stablecoin has two fundamental obligations: (1) convert, redeem, or repurchase the payment stablecoin from the coin holder for monetary value (e.g., cash); and (2) create a reasonable expectation that the payment stablecoin will maintain a stable value. The GENIUS Act also imposes the following additional obligations on issuers:

1. 1:1 Reserve Backing

Issuers need to keep enough reserves to back every stablecoin issued: dollar for dollar. Reserves must consist of cash, short-term U.S. Treasuries, certain money market funds, or other approved low-risk assets. Reserves that comply with the GENIUS Act are “bankruptcy remote,” which means they must be held by qualified custodians and are off-limits to other creditors.

2. Restrictions on Issuer Activities

The GENIUS Act imposes significant restrictions on the activities of issuers of payment stablecoins, limiting such activities to:

• issuing and redeeming payment stablecoins;
• managing reserves;
• custodial or security services; and
• functions directly related to one or more of the above activities.

The Genius Act also prohibits both domestic and foreign permitted issuers from paying interest or yield to holders of payment stablecoins.

3. Par Redemption

Under the GENIUS Act, issuers must redeem 1 coin for $1 in cash with clear procedures and advance notice for any policy changes.

4. Transparency Measures

Every month, an issuer must publish a breakdown of its reserves, have its executive team certify as to the accuracy of those numbers, and have an outside accounting firm review its report. Issuers also need to make their redemption policies public and have a process in place to redeem coins quickly when users ask.

5. Other Requirements

Issuers must also meet the Genius Act’s capital, liquidity, risk management, marketing, anti-tying, audit and reporting, anti-money laundering, and economic sanctions compliance requirements. The Genius Act provides that issuers will be treated as financial institutions under the Bank Secrecy Act, which means that they will need to comply with the Bank Secrecy Act’s anti-money laundering and Know Your Customer (KYC) requirements. The Genius Act also establishes bankruptcy provisions for permitted issuers.

How will issuers be supervised?

The OCC regulates federal qualified payment stablecoin issuers, while subsidiaries of insured depository institutions are overseen by their respective federal banking agencies. State-qualified issuers with less than $10 billion in outstanding stablecoins may be regulated solely at the state level if the state regime is certified as “substantially similar” to the federal regime. Issuers exceeding this threshold, or those in non-certified states, are subject to joint state and federal oversight. The SCRC regulates certification and review of this process as well as the approval process for non-financial public companies applying to be permitted payment stablecoin issuers.

Does the Genius Act permit foreign payment stablecoin issuers to sell payment stablecoins in the U.S.?

Yes, subject to certain additional restrictions. Foreign payment stablecoin issuers may offer or sell stablecoins in the U.S. if they are subject to a regulatory regime deemed comparable by the Secretary of the Treasury, are registered with the OCC, maintain sufficient U.S. reserves, and are not domiciled in sanctioned or high-risk jurisdictions. Foreign issuers must comply with U.S. reporting, supervision, and enforcement requirements.

What requirements does the Genius Act place on custodial service companies and banks?

Entities providing custodial or safekeeping services for stablecoins or related assets must be subject to federal or state supervision and adhere to detailed requirements regarding accounting and segregation. The GENIUS Act does not restrict banks or depository institutions from engaging in otherwise permissible digital asset activities, including issuing digital assets representing deposits or providing custodial services.

Is a payment stablecoin a “security” under the federal securities laws?

No. The GENIUS Act expressly excludes payment stablecoins issued by permitted issuers from the definition of a “security” under the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the Investment Company Act of 1940, the Investment Advisers Act of 1940, and the Securities Investor Protection Act of 1970. These stablecoins are also excluded from the definition of “commodity” under the Commodity Exchange Act. The GENIUS Act clarifies that permitted stablecoin issuers are not required to register as investment companies solely due to stablecoin issuance and that advice limited to such stablecoins does not trigger investment adviser registration.

When will the GENIUS Act become effective?

The GENIUS Act becomes effective on the earlier of January 18, 2027, or 120 days after the issuance of implementing regulations by federal banking regulators. Until the effective date, any person may issue, offer, or sell payment stablecoins in the U.S. After the effective date, only permitted issuers may issue stablecoins, with a transition period for the offer and sale of pre-existing stablecoins until July 18, 2028, when full restrictions take effect.

How Have Banks Responded to the GENIUS Act?

In a joint letter to Senate Banking Committee leaders, the American Bankers Association and more than 50 state banking associations urged Congress to tighten the GENIUS Act, warning that several “loopholes” could jeopardize consumer protection and the stability of the banking system. The groups argued that the GENIUS Act’s ban on interest-bearing stablecoins is easily circumvented because exchanges and other third parties may still offer yield, potentially siphoning deposits away from traditional banks. They also pressed lawmakers to eliminate an exemption that allows non-financial companies to obtain federal approval to issue stablecoins, contending that mixing commerce and banking heightens conflicts of interest and competitive imbalances. Finally, the bankers asked Congress to repeal a provision permitting state-chartered issuers to operate nationwide without additional state approvals, asserting that it undermines the dual banking system and state consumer-protection authority.

What does the GENIUS Act mean for the future of banks and stablecoin issuers?

The GENIUS Act introduces a new era of regulatory clarity and operational requirements for both stablecoin issuers and banks. For stablecoin issuers, the GENIUS Act establishes a clear path to legal compliance, but also imposes significant obligations, including licensing, reserve backing, activity limitations, and ongoing reporting and audit requirements. Only entities that qualify as permitted payment stablecoin issuers, such as subsidiaries of insured depository institutions, federal qualified issuers, or state-qualified issuers, will be able to issue payment stablecoins in the U.S. after the effective date. Foreign issuers must meet comparable regulatory standards and register with U.S. authorities to access the U.S. market.

Banks and depository institutions may continue to engage in digital asset activities that are otherwise permissible under existing law, including issuing digital assets representing deposits and providing custodial services for stablecoins and related assets. However, banks seeking to issue payment stablecoins must do so through approved subsidiaries and comply with the GENIUS Act’s requirements. The GENIUS Act also clarifies that payment stablecoins issued in compliance with the GENIUS Act are not considered securities or commodities, reducing regulatory uncertainty for banks and issuers alike.

Overall, the GENIUS Act is expected to foster greater confidence and participation in the U.S. stablecoin market, while raising the bar for compliance, transparency, and risk management.