The guide to whether a policymaker should vote for a piece of legislation should be the axiom from the Greek philosopher Hippocrates: “first, do no harm.” Legislation can never be perfect, but it should at least stop a problem from getting worse.
On this test, stablecoin legislation currently pending in the Senate fails. The GENIUS Act may represent a modest regulatory improvement if stablecoins were a niche crypto product used to enable trading in volatile cryptocurrencies like Bitcoin; but it’s not robust enough to support the future of household payments. By legitimizing stablecoins and empowering consumers to use them without materially improving oversight, the GENIUS Act is one of those times where doing nothing is better than doing something.
Consumer Protection
The CFPB will have less authority after the GENIUS Act then it has under current law
During the Biden Administration, the Consumer Financial Protection Bureau (CFPB) made inroads into regulating crypto to the extent that it is used for personal, household or family purposes (in other words, when crypto is used to buy stuff and not for investments). Specifically, the CFPB proposed a rule to clarify that consumer protections under payments law (the Electronic Funds Transfer Act, or EFTA, and the attendant Reg E), including error resolution procedures for electronic financial transactions, rules around ATM withdrawals, and protections for online payments, apply to stablecoin payments.
The crypto industry forcefully fought it. In fact, the industry vigorously argued that they fell outside the CFPB’s jurisdiction—notwithstanding the claims about stablecoins being the future of personal, household and family payments. When President Trump was inaugurated, the CFPB’s rule effectively died—for now.
What does this have to do with the GENIUS Act? Well, by legislating on the issue of stablecoins and affirmatively choosing not to include language on the application of consumer finance law, the sponsors are creating an inference against regulatory action by a future CFPB (that is, if the agency continues to exist. The Trump Administration has separately tried to fire the entire CFPB staff en masse and is currently litigating against the National Treasury Employees’ Union to do so).
Recent Supreme Court precedent related to administrative law, including Loper Bright v. Raimondo and West Virginia v. Environmental Protection Agency create significant headwinds for agencies’ interpretive power in the absence of an explicit congressional directive. First, Loper Bright generally removes deferral to agency expertise when agencies interpret ambiguous terms in statutes (i.e., eliminates the concept of “Chevron deference”). Additionally, West Virginia v. EPA introduces the new “Major Questions Doctrine,” which eliminates agencies’ power to write rules when (1) the underlying claim of authority concerns an issue of “vast economic and political significance,” and (2) the Congress has not clearly empowered the agency with authority. These Supreme Court cases were cited in crypto industry comment letters after the CFPB’s rule was proposed and before Congress legislated on the issue. If Congress takes up stablecoin legislation and affirmatively declines to comment on consumer protection, the crypto industry and a willing judiciary will be even more empowered to strike down any attendant regulations as being outside the legislative intent.
Finally, the latest version of the GENIUS Act at Sec. 4(a)(1)(B)(i) made things even worse by providing exclusive jurisdiction to other non-CFPB agencies with regard to the oversight of stablecoin redemption policies (including timeliness, junk fees, disputes, and other items the CFPB otherwise regulates under Reg E). In other words, this bill basically undercuts the CFPB and leaves it with less power to clarify the application of consumer laws to stablecoins than it has under existing law.
Investor Protection
Creates ambiguity that could stop the SEC from policing investment contract schemes involving stablecoins
The GENIUS Act stipulates that stablecoins are not securities and outside the reach of the SEC. On its face, that’s fine, since stablecoins don’t typically offer a return on investment and the SEC therefore isn’t the appropriate regulator. However, there are cases where stablecoins could be used in an arrangement that a reasonable investor would expect is a money-making opportunity.
For example, take the case of the TerraUSD (UST) stablecoin launched by the notorious fraudster Do Kwon. While UST was an algorithmic stablecoin (and not a stablecoin pegged to fiat currency as contemplated in the GENIUS bill), it still provides a useful cautionary tale for policymakers. The SEC successfully litigated that UST was a security not because it was algorithmic, but because it was marketed in the context of the Anchor Protocol, a Kwon-affiliated blockchain protocol that promised investors 19-20% yield if they deposited their UST. The court agreed with the SEC that because the Anchor Protocol permitted UST holders to pool their tokens with other depositors with the goal of generating returns based on interest charged by Terraform to the Anchor Protocol’s borrowers, transactions involving UST in combination with the Anchor Protocol constituted investment contracts.
In other words, there are arrangements involving stablecoins that could constitute securities offerings. This bill—while providing a blanket statement that stablecoins are not securities—could throw future law enforcement action against schemes like TerraUSD into question. And this is not a farfetched musing: after nixing a yield program back in 2021 upon a warning from the SEC, Coinbase resurrected it’s stablecoin deposit product after the 2024 election, which now promises users 4% returns on the USDC stablecoin. That product ought to be registered with the SEC (or alternatively offered by a chartered bank) but Coinbase moved forward with it anyway in the face of SEC enforcement forbearance.
State Sovereignty
Undercuts the first line of defense in consumer protection – state enforcers
Nonbanks that operate in payments are currently (generally) licensed at the state level as money service businesses. While the CFPB has authority to write rules, supervise and enforce federal consumer financial services law against nonbank financial companies for certain payment activities, that is now in question as the CFPB litigates its continued ability to exist. So state enforcers are the first line of defense as the Trump Administration regulators stand down.
The GENIUS Act guts state agencies’ authorities by shifting jurisdiction over the largest stablecoin issuers like Circle and Tether to federal financial agencies and pre-empting state law. This is concerning given that state regulators have been some of the most proactive agencies at addressing stablecoin risks. To that end, the Conference of State Bank Supervisors has raised concerns about this pre-emption.
Encroachment Into Government Payments
Accelerates adoption of an untested financial instrument – potentially into government payments
The legitimization of stablecoins through this imperfect, light-touch regulatory framework will accelerate the President’s attempts to integrate his or others’ stablecoins into the government payments systems. President Trump already issued an Executive Order opening the door to federal government payments using “digital payments” and “digital wallets.” That may sound innocuous, but the government already makes 95% of its disbursements electronically. Meanwhile, Elon Musk has endorsed putting government payments (including those related to Social Security and veterans’ benefits) “on the blockchain”—and in so doing, make public payments with private stablecoins. The Administration has already floated issuing $3.3 billion in HUD Community Development Block Grants via stablecoins. USAID has been instructed to make disbursements in stablecoins. This legislation will be seen as policymakers’ endorsement and legitimization of all of these worrying possibilities and it will be hard to walk back.
Silence on Conflicts of Interest
Lack of legislative provisions on conflicts signals tacit approval
Notwithstanding news outlets’ nonstop coverage, the GENIUS Act is virtually silent on conflicts of interest such as those related to the President launching his own stablecoin and profiting off of various crypto ventures. Passing this legislation will be perceived by the public as a tacit acceptance of the President’s business arrangements and the ability of foreign governments and individuals to use stablecoin investments to influence policy outcomes. Supporters of the President will use lawmakers’ votes for the bill as them co-signing corruption and conflicts of interest. The only thing that most Americans may know about stablecoins is that their President created one and is making money off of it. Lawmakers’ silence on this brazen move, while separately spending precious legislative time on this very topic, will be noticed.
Conclusion
To be clear, there are some good provisions in the GENIUS Act. More transparency over reserve assets held by stablecoin issuers, for example, is a useful protection for investors and the financial system and would address some of the concerns around stablecoin issuers’ holdings. But the guardrails provided by this bill do not measure up to the explosive growth in stablecoins that will be enabled by it. The GENIUS Act will put the imprimatur of the U.S. government on this product, stablecoin issuers will market themselves as highly regulated and consumers will falsely place their trust in these synthetic dollars. Yield-bearing stablecoin affiliate arrangements will explode. Big Tech companies will pitch their own proprietary money. And many for-profit entities (including the Trump Organization) may try to sell the U.S. government on using their stablecoin technology for some critical service like disaster relief. The GENIUS Act may be fit for purpose if stablecoins were a niche crypto product used to enable Bitcoin trading; but it’s not robust enough to ensure the stable future of money.
