Regulating the Future of Money: The Legal Implications of the GENIUS Act
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When you deposit your paycheck into the bank, you create money. When you take out a mortgage to buy a house, you create money. When you use a bank loan to pay for college, you create money. Perhaps unknowingly, individuals have immense power in the financial markets. This power is one of the financial system’s greatest strengths, but without adequate regulation, it can also become one of its greatest vulnerabilities. Because ordinary citizens' livelihoods depend on this system, governments have a responsibility to regulate it.
The financial system consists of several distinct sectors, such as banking, securities, and cryptocurrency. While most sectors are strictly regulated, cryptocurrency was not regulated at all until 2025. Senator Elizabeth Warren indicated that “no financial industry should get to write its own playbook—you either comply with the law or you face tough consequences for violating it. Crypto is no different.”
On July 18 2025, the Guiding and Establishing National Innovation for US Stablecoins Act, commonly known as the GENIUS Act, was signed into law by President Donald Trump. The Act is the first federal law in the US that regulates stablecoins, a specific type of cryptocurrency. Stablecoins are digital assets designed to be used as a means of payment. They use the technology underpinning cryptocurrencies but peg their value to a stable asset, typically the dollar.
This article will be analyzing the GENIUS Act under three categories: the regulatory landscape preceding its enactment, the changes it introduces, and the anticipated effects of its full implementation in 2027.
The Regulatory Landscape Before the Enactment of the GENIUS Act
Before the GENIUS Act came into legislation virtually anyone could issue a stablecoin. While some states had enacted their own legislation, stablecoins were not subject to a comprehensive federal regulatory framework. This created vulnerabilities that could be exploited for illicit activities such as money laundering and evasion of certain sanctions. Stablecoin issuers and users did not necessarily fall within the same regulatory framework as traditional banks, meaning that applicable anti-money laundering and know-your-customer (KYC) obligations did not apply to them. The absence of federal legislation created uncertainty surrounding the government's authority to freeze or seize stablecoins. Enforcement was also challenging from a practical standpoint because decentralized blockchain wallets did not have to be linked to their owners' real-world identities, making it more difficult for authorities to identify the individuals behind transactions and intervene in illicit transfers. Finally, stablecoins enabled instantaneous money transfers, including international transactions, without involving traditional financial intermediaries that could conduct anti money laundering and know your customer checks.
Changes made by the GENIUS Act:
The GENIUS Act introduced a licensing and approval system where stablecoins could only be issued by entities subject to regulatory oversight. Under Section Three of the Act, it is unlawful for anyone other than a permitted stablecoin issuer to issue a payment stablecoin in the United States. Issuers with over $10 billion in stablecoin issuance are subject to federal oversight, while smaller issuers are bound by state regulations.
Second, issuers are now required to hold reserves equal to the full value of the stablecoins they issue. For example, if a company issues $1 million worth of stablecoins, it must hold $1 million in approved assets to back them. The Act also limits what assets qualify as reserves. While some issuers previously relied on riskier assets, such as corporate debt and highly volatile stocks or Bitcoin, they are now restricted to cash, demand deposits at insured depository institutions, deposits at Federal Reserve Banks, Treasury bills with remaining maturity of 93 days or less, and money market fund shares invested solely in these assets (including tokenized versions). The law explicitly prohibits reserves in corporate debt, commercial paper, or other non-governmental securities. Stablecoin issuers are required to publish monthly reports showing their reserves. These rules help ensure that issuers have enough money to pay users back when they want to exchange their stablecoins for dollars. However, this raises an important question: if stablecoins must now be backed by reserves equal to their full value, held in assets similar to cash, what advantages do they offer over traditional money? Does this level of regulation reduce the financial benefits that made stablecoins attractive to investors in the first place?
It is important to understand that stablecoins represent a different form of money, rather than a different amount of value. One stablecoin pegged to the U.S. dollar is designed to be worth the same as one physical dollar. However, the two operate differently.
Both forms of money offer distinct advantages. Traditional physical currency is widely accepted and allows individuals to make transactions without relying on technological platforms. Stablecoins, on the other hand, offer the advantages of digital transfers, including near-instantaneous transactions, lower costs for international transfers, and 24/7 availability. They can also facilitate access to dollar denominated value for funds for businesses and individuals operating in countries that have insatiable currencies.
Another change made by the GENIUS act is that issuers are not permitted to give interest earnings to stablecoin holders. A stablecoin can be backed by assets that generate returns, yet the issuer cannot simply pass those returns to holders as interest on the token. This helps distinguish payment stablecoins from interest-bearing bank deposits and may limit incentives for consumers to treat stablecoins as savings accounts. Almost all other countries, including the EU, have restricted interest payments in their stablecoin frameworks, so this is not unique to the US.
Analysis:
Why isn’t the Federal Reserve issuing its own stablecoins?
While policymakers debated how stablecoins should be regulated, one alternative was for the central bank to issue its own digital currency, rather than relying on privately issued stablecoins. A central bank digital currency (CBDC) would be a digital form of the U.S. dollar issued directly by the Federal Reserve, rather than by private companies. This could reduce the risks associated with private issuers failing to maintain sufficient reserves.
Several countries have chosen to issue their own digital currency through the central bank rather than relying entirely on privately issued stablecoins. This is called a central bank digital currency (CBDC). Examples include the digital yuan by China, Sand Dollar by the Bahamas, the eNaira by Nigeria, and more.
Instead, the US has chosen to support privately issued stablecoins. The reason the U.S. did not pursue this approach was largely due to concerns about financial disintermediation and the potential disruption of the traditional banking system. Financially, if people moved their money from commercial banks into a government-issued digital currency, banks could lose deposits that they use to provide loans to individuals and businesses. This could reduce the availability of credit which would increase borrowing costs. Additionally, because a CBDC would represent a direct claim on the Federal Reserve rather than a private bank, consumers might rapidly transfer their deposits into CBDCs during periods of financial instability, potentially accelerating bank runs. In the long run, this could expose the economy to the risk of a large scale financial crisis.
Why are stablecoin issuers not permitted to give interest?
It is common practice, in almost all countries around the world, for stablecoin issuers to be prevented from paying interest to their customers. The main goal for this is to use stablecoins as alternatives to money rather than as investment mechanisms. However, in this case, the customer is faced with a question: if they keep the money in the bank, they get interest, if they keep it in stablecoins, they don’t. So why would anyone choose stablecoins? In response to this, issuers have created alternative methods that allow users to generate returns on their stablecoin holdings. These include exchange and wallet rewards, through which trading platforms distribute a portion of their reserve income or operational earnings to users in the form of promotional or service-based incentives, and decentralized finance (DeFi) lending and staking, which allow users to deposit stablecoins into liquidity pools or lending protocols in exchange for returns generated by borrowing fees or other protocol-based incentives.
The reason stablecoin issuers are restricted from paying interest is not arbitrary. Unlike commercial banks, stablecoin issuers are not permitted to operate as traditional lending institutions using their customers' backing funds. Commercial banks can use deposits to finance loans to individuals and businesses, earning interest from borrowers and using part of that income to pay interest to depositors. Stablecoin issuers, however, must maintain reserves equal to the value of the stablecoins they issue, using legally permitted reserve assets. Their income therefore comes primarily from the interest earned on these reserve assets, rather than from lending the backing funds to borrowers. If stablecoin issuers were allowed to lend out their reserves, they could no longer guarantee that every stablecoin was backed by an equivalent amount of readily available assets. This would create a mismatch between their assets and their obligations to customers: while the issuer's loans might not be repaid immediately, stablecoin holders could demand redemption at any time. If a large number of customers attempted to redeem their stablecoins simultaneously, the issuer might be unable to return their money, potentially triggering a loss of confidence, mass redemptions, and a collapse in the stablecoin's value. This is precisely the type of liquidity risk that the 1:1 reserve requirement is designed to prevent.
Although the GENIUS Act prohibits permitted payment stablecoin issuers from paying interest for stablecoins, further clarification may be necessary to address rewards or other financial incentives offered through alternative structures which serve similar purposes to interest.
Preventing Money Laundering:
One of the main challenges in regulating stablecoins is establishing the identities of individuals behind blockchain transactions. Although blockchains provide transparent and permanent records of transactions, wallet addresses are not inherently connected to the real-world identities of their owners.
The GENIUS Act addresses this issue by requiring permitted payment stablecoin issuers to establish Customer Identification Programs (CIPs), including procedures to identify and verify account holders before establishing an account. This is an important step, however, the Act does not require individuals to independently verify their identities before every individual transaction. Notably, Section 4(a)(5)(A)(v) also requires the identification and verification of high-value transactions. However, the Act itself does not define what constitutes a "high-value transaction" in terms of a dollar value. This is a significant shortcoming: at what transaction value should additional identity-verification requirements apply?
Further clarification is necessary to address this.
Looking Ahead
While the GENIUS Act is a significant step for regulating stablecoins, it addresses only one segment of the broader cryptocurrency ecosystem. Other forms of digital assets, decentralized finance (DeFi), cryptocurrency exchanges, and blockchain-based financial services raise distinct regulatory challenges that remain to be addressed. Consequently, a more comprehensive regulatory framework will be necessary to address the evolving risks and complexities of the wider crypto industry.
Ceylin Sonmez is a freshman studying Economics and (potentially) Computer Science. She just joined the Brown Undergraduate Law Review this year and can be reached at ceylin_sonmez@brown.edu.
Emily Walsh is a junior studying Philosophy and International & Public Affairs. She is a senior editor for the Brown Undergraduate Law Review and can be reached at emily_m_walsh@brown.edu.
Priyanka Nambiar is a junior studying Cognitive Neuroscience. She is an editor for the Brown Undergraduate Law Review and can be reached at priyanka_nambiar@brown.edu.