Stablecoins and the Genius Act - Olaf Ransome

Why is this an important topic?

Stablecoins are off to the races across the pond. The Donald and his team have been preparing a plan, and now with the help of the Senate are moving to making new laws to help and encourage things stablecoins.

What’s new or changing?

Hot on the heels of an Executive Order (see my last post) about Stablecoins comes a formal initiation of a proposed new law on them: the Genius Act of 2025 aka Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act.

In his first stint at 1600 Pennsylvania Avenue, the Trump administration were apparently slow to get started and even completely failed to start in some areas. For more on that, Michael Lewis’s “The Fifth Risk” deserves a read.

It’s different this time. The team is ready with that bill which has been read in the Senate, kicking off its path to being a new law.

Say what you will of the toupe’d one; his flurry of activity is the exception to the old saw that the wheels of bureaucracy grind slowly. Given there is a republican majority in both the House and the Senate, it is worth understanding where this is all going.

Read on for my recap of this proposed Genius Act. I am not a genius, and the bill runs to 57 pages, and it is in that turgid prose that seems to be the default of lawmakers all over. So there is every chance I might have missed one or other nuance. That said, I hope my precis is useful.

In the old world of payments, securities, and financial services generally, the laws are pretty clear on what types of activities need permission to be offered. The Act does the same for “payment stablecoins” requiring them to be permitted aka licensed. It does only apply to activities in the United States. For a view on might happen to those outside the US who would like to issue USD denominated stablecoins, see my last post.

Permission is a two-tier structure. Anything under $10 billion is considered a State affair, anything over is a Federal one. All of this is clear and sensible.

The bill is both prescriptive and proscriptive. It prescribes what investment types a stablecoin issuer may invest in. It proscribes some activities, such as re-hypothecation, i.e. creating leverage, except in a very narrow set of circumstances. Also, the Act proposes limits to the business scope of a permitted stablecoin issuer. All of this is good.

There is also an eye to transparency and accountability. Month-end reporting of issuance vs. assets held, together with a validation from an outside accounting firm. On top of that the CEO and CFO must both sign-off that the reporting is accurate. This is mostly good, I would have gone a bit further, because I think the monthly part is too long. I would require a daily NAV and publishing of the NAV vs. the issuance on the company website.

If I read the text properly there is some provision for issuers to get Fed approval even if they are under the $10 billion level for state licensing should the wheels of state bureaucracy grind too slowly.

There is also some text on what I would call the SLA or service level agreement. The Act gives the Fed 120 days to evaluate a properly completed application, coupled with the obligation to issue details of any denied applications within 30 days. If the Fed does not act on time, approval is granted. I love this. There is a time for principle-based regulation and a time for rule based. This is one of the latter. Right now, I am involved in a license application for a FinTech in Switzerland. Even though we are in the Champions League of timetables and punctuality with our trains, that general Swiss virtuousness does not extend to there being a timetable for our regulator. So, permission to be jealous is in order here.

There is also a provision that I would put under the banner of “consumer protection”. The Act includes a clause with a novel bankruptcy provision for stablecoin issuers. Normally, if a bank goes bankrupt, customers’ securities are protected but cash positions beyond any insurance amount come down the order in the list of creditors, with tax men of all flavours, pension funds and employees’ wages ahead in the pecking order. Under the Genius Act proposals, stablecoin holders go straight to the top of the bankruptcy pecking order.

In Conclusion

Even if you don’t like Trump, there is a lot to admire here and a clear path to something decisive happening in the stablecoin space.

Back in private school, our term report had a grade for effort and another for achievement; “double A” being the holy grail with attendant bragging rights. Trump and his team get an A for effort; they are prepared, they have strong views, and they have a plan.

Bureaucrats are schooled in the fine art of delaying tactics, exemplified by the archetypal Sir Humphrey Appleby in Yes Minister and Yes, Prime Minister who when asked by his Minister how to reply to some request and delay it responded with something like: “In the fullness of time, in due course, and at the appropriate juncture, after consideration and deliberation and appointment of the usual committees.” I love the inclusion of an SLA to hold the Fed and the State Regulators to a fixed schedule. Wiggle room is very limited.

There will be new issuers, and I would expect stablecoins to become more and more used. Just maybe there is also some flexing of muscles internationally; US business says to European supplier “If you want to sell to me, I will pay you in USDC!” With the Donald back in the White House, some folks may want to imitate their leader and do a deal.

Thanks for reading. Please do let me know what you think of these notes. Feedback via the comments would be great.

Author

Olaf Ransome is a liquidity and financial services expert. He is the founder of 3C Advisory You can message Olaf directly here.