On May 19, 2025, the U.S. Senate passed the GENIUS Act, officially titled the Guiding and Establishing National Innovation for U.S. Stablecoins Act, with a vote of 66 in favor and 32 against. This marks the first time the U.S. has established a federal regulatory framework for stablecoins. The bill has not yet officially taken effect, as it still requires approval from the House of Representatives and the President's signature. If it ultimately becomes law, it will have a profound impact on the issuance and use of stablecoins. This article will analyze the core provisions of the bill and its potential implications.
1. Core Provisions of the GENIUS Act
The bill clearly defines stablecoins as Payment Stablecoins, which are digital currencies pegged to fiat currencies like the U.S. dollar and can be used directly for payments or settlements. The value of these payment stablecoins must always maintain a 1:1 peg with fiat currencies like the U.S. dollar, backed by real and transparent reserves, and the reserve assets cannot include algorithmic mechanisms or highly volatile cryptocurrencies. Users can redeem them for fiat currency at any time. This definition clarifies the payment nature of stablecoins, indicating they are not tools for speculation or arbitrage.
1.1 Issuer Qualifications
According to the GENIUS Act, both domestic and foreign entities wishing to issue or circulate stablecoins in the U.S. must meet strict issuer qualification requirements.
For domestic issuers, only three types of institutions are qualified to issue stablecoins:
First, non-bank institutions holding federal licenses, such as some licensed fintech companies. These institutions are not banks but have received approval from the federal government. For example, Circle, the issuer of USDC, is not a bank and cannot lend or accept deposits like a bank, but it has obtained a "federal license" in the U.S., allowing it to issue stablecoins compliantly.
Second, regulated bank subsidiaries, meaning banks can issue stablecoins through their subsidiaries. This indicates that the U.S. government allows traditional banking institutions to participate in the stablecoin market through their subsidiaries.
Third, state-level issuers approved by state governments, whose regulatory standards are recognized by the Treasury Department as being fundamentally consistent with federal standards. These compliant issuers must maintain a 1:1 asset reserve (such as cash, government bonds, or central bank deposits) and regularly disclose reserve conditions and redemption policies, while also undergoing third-party audits. If the total issuance of stablecoins exceeds $10 billion, they must be subject to federal regulation, with the Federal Reserve or the Office of the Comptroller of the Currency (OCC) as the regulatory body. This provision primarily targets smaller, early-stage projects, allowing them to start with state-level compliance before gradually expanding to federal levels.
For foreign issuers, even if the company is established overseas, as long as their stablecoins are aimed at the U.S. market, they must comply with U.S. regulatory rules.
First, these institutions must come from countries or regions with regulatory systems comparable to that of the U.S., such as the UK or Singapore, which have established digital asset regulatory frameworks; those from regions without stablecoin regulatory systems may not be able to obtain licenses.
Second, issuers must register with the OCC in the U.S.
Additionally, they must be able to comply with legitimate orders from the U.S. government (such as freezing or destroying tokens).
They must also maintain sufficient reserves in U.S. financial institutions to ensure they can meet the redemption and liquidity needs of U.S. users.
Overall, whether domestic or foreign, the U.S. aims to bring stablecoins under a regulatory framework equivalent to traditional finance through the GENIUS Act, ensuring their safety, transparency, and compliance, and preventing stablecoins from becoming a "gray area" in the financial system. This also means that in the future, only those institutions capable of meeting high regulatory standards will be able to issue and legally circulate stablecoins in the U.S.
1.2 Reserves and Transparency
The GENIUS Act also sets clear requirements for the asset reserves of issuers. Companies issuing stablecoins must ensure that for every stablecoin issued, there is a corresponding safe asset worth $1 backing it. These assets must be safe, highly liquid assets like cash or short-term U.S. Treasury bonds, and cannot include riskier assets like stocks or corporate bonds as reserves. To prevent misuse of funds, these reserve assets must also be managed separately from the company's operational funds and cannot be diverted for other uses, such as investments or collateral. Furthermore, the bill specifically states that stablecoins cannot pay interest or returns to users, meaning stablecoins are a payment product, not an investment product, and cannot compete with bank deposits for business. Stablecoins cannot become "high-yield digital deposits," indicating a possible trend: while stablecoins are not allowed to pay interest, bank deposits can, suggesting that banks may actively enter the stablecoin space, launching their own digital dollars or euros to attract users with "compliance + interest" strategies to capture market share. Although stablecoins issued by banks cannot directly pay interest, banks can offer a more attractive overall financial experience through "associated accounts, cashback mechanisms," etc., thus participating in the competition within the stablecoin sector. The future stablecoin market may not only be a competition among various stablecoins but could also involve competition between traditional banks and crypto companies.
Additionally, to ensure the transparency of reserve assets, issuing companies are required to publicly disclose their reserve details once a month, confirmed by executives such as the CEO or CFO, and reviewed by professional accounting firms. If the total issuance of stablecoins exceeds $50 billion, an annual financial audit is also required to further ensure the safety of reserve funds and user funds.
1.3 Anti-Money Laundering and Compliance
Under the GENIUS Act, all companies issuing stablecoins must comply with anti-money laundering regulations under the Bank Secrecy Act, just like traditional banks. This means these companies are legally considered "financial institutions" in the U.S. and must fulfill obligations to monitor the flow of funds and prevent money laundering and terrorist financing.
All payment stablecoin issuers must establish a complete set of "anti-money laundering" and "compliance" processes and systems as required by the government. The purpose of this is to prevent these digital currencies from being used for illegal activities, such as money laundering, funding terrorism, evading economic sanctions, etc. This includes but is not limited to:
Developing anti-money laundering policies. The company needs to provide a document explaining how it plans to prevent money laundering, informing employees and regulators of their intentions.
Appointing a responsible person to manage the entire compliance system. The company must find a qualified individual who understands compliance to oversee the entire anti-money laundering system, ensuring that it is not merely a formality but that someone is genuinely monitoring these matters.
Identifying and verifying user identities (KYC). Everyone must undergo identity verification before using the stablecoin product. The issuer needs to know who is using their stablecoin product.
Checking whether users are on sanction lists. The issuer must ensure that their customers are not individuals blacklisted by the U.S. or other governments, such as terrorists, drug traffickers, or officials from sanctioned countries.
Monitoring and reporting large transactions or suspicious activities. For example, if someone suddenly transfers $1 million or frequently transfers to unfamiliar addresses, the system must be able to identify these abnormal operations and report them to regulatory authorities.
Keeping transaction records for regulatory review. The company must archive every transaction, such as who transferred to whom, how much was transferred, and when, for government auditing purposes.
Preventing any legally prohibited transactions. If a transaction is found to violate the law, such as transferring funds to a black market website, the company must be able to lock that transaction to prevent it from occurring.
In addition to institutional requirements, issuers must also have the technical capability to quickly freeze certain accounts or block specific transactions upon orders from the Treasury or courts. For instance, if a certain address is suspected of criminal activity, and the U.S. government issues an order for timely action on that account, the issuer must be able to execute the order, performing actions such as freezing (preventing transfers), destroying (rendering it void), or blocking (preventing trading) those token accounts.
If stablecoins are issued by foreign companies wishing to enter the U.S. market, they must also comply with U.S. anti-money laundering and sanctions regulations. If they do not meet the requirements, the U.S. Treasury will blacklist them and prohibit U.S. platforms from providing trading services.
The core purpose of this system is to ensure that stablecoins do not become tools for money laundering, evading sanctions, or other illegal activities.
1.4 Consumer Protection
The core purpose of the GENIUS Stablecoin Act is to protect ordinary users, ensuring that they do not have to worry about the safety of their funds, being misled, or encountering risks of default when using stablecoins.
In addition to the series of requirements for issuers and asset reserves mentioned above, the bill also requires issuers to publicly disclose the composition of their reserves monthly, allowing consumers to know how their money is being safeguarded. Furthermore, the bill strictly prohibits misleading advertising, such as claiming that stablecoins are "guaranteed by the U.S. government" or "insured by the FDIC," to prevent users from mistakenly believing that these coins are as safe as bank deposits. In reality, stablecoins are not bank deposits, do not have government backing, and are not insured by the FDIC. If stablecoins encounter issues, such as losing their peg, failing to redeem, or the issuing institution going bankrupt, users may not be able to recover their funds, and the risk must be borne by the users themselves; the government will not compensate them.
Additionally, the bill clarifies the coordination mechanism between state and federal regulation to prevent issuers from using "regulatory arbitrage" to choose the state with the least stringent regulations to evade management. When a stablecoin project in a certain state reaches a certain scale, it must accept federal regulation; otherwise, it cannot continue to expand its issuance.
Finally, if a stablecoin issuing company goes bankrupt, the GENIUS Act explicitly states that users' funds must be prioritized for repayment, ahead of other creditors, and requires courts to expedite the liquidation process. This means that even if the company fails, users have a better chance of recovering their funds more quickly and preferentially.
2. Potential Implications
Next, we will examine which currently widely used stablecoins comply with U.S. regulatory policies based on the provisions of the GENIUS Stablecoin Act and which do not comply as closely.
2.1 Fiat-Backed Stablecoins
The principle of fiat-backed stablecoins is that for every stablecoin issued, there is a corresponding safe asset worth $1 (such as cash or short-term U.S. Treasury bonds) backing it. This means that users can theoretically redeem stablecoins for real U.S. dollars at any time, making these stablecoins highly stable and relatively low-risk, widely used in trading, payments, and the DeFi ecosystem.
Among this type, USDC is currently the most compliant with U.S. regulatory requirements, issued by the licensed U.S. company Circle, with transparent operations that meet most of the regulatory requirements in the GENIUS Act. Therefore, USDC is expected to become one of the most policy-supported stablecoins in the future.
Another notable stablecoin is PYUSD, launched by payment giant PayPal in collaboration with the licensed institution Paxos. Both institutions hold legitimate financial regulatory licenses in the U.S., making PYUSD favorable in terms of compliance. Additionally, backed by PayPal, PYUSD is likely to be more adept at developing everyday financial scenarios such as payments, transfers, and cross-border remittances, aligning with the U.S. definition of stablecoins for payment scenarios.
The third is FDUSD, issued by First Digital, registered in Hong Kong, with a relatively high level of compliance and backed by audits and asset support. However, since the company is not registered in the U.S., it remains to be seen whether it is willing to cooperate with U.S. regulatory authorities' orders (such as freezing or destroying user accounts when required by the government), which will affect its development prospects in the U.S. market.
Currently, the largest stablecoin by market capitalization, USDT, is issued by Tether, a company registered in the British Virgin Islands. It does not have a license from U.S. financial regulators and operates in a legal gray area. Although it is widely used, it may face strong regulatory pressure from the GENIUS Act, especially regarding its circulation in the U.S. market and user confidence.
2.2 Decentralized Over-Collateralized Stablecoins
Decentralized over-collateralized stablecoins are stablecoins that do not rely on traditional banks or centralized institutions. Their core principle is that users collateralize their crypto assets (such as ETH, BTC) into smart contracts on the blockchain to generate stablecoins through "over-collateralization." This mechanism ensures that even with market fluctuations, the value of the coins remains stable.
DAI is a representative example; it is a well-known decentralized over-collateralized stablecoin issued by the MakerDAO protocol. Users can collateralize various crypto assets like ETH and wBTC into a smart contract, and as long as the collateralization ratio is sufficiently high (usually above 150%), they can generate DAI. For instance, if you collateralize $150 worth of ETH, you can generate up to $100 worth of DAI, providing a buffer against ETH price fluctuations. The biggest feature of DAI is that it operates entirely on-chain, with no centralized institution controlling it, meaning no one can freeze your account or destroy your assets, making it a truly "decentralized" stablecoin. However, this design also presents regulatory challenges: for example, the GENIUS Act requires issuers to have the technical capability to operate user accounts at any time to cooperate with law enforcement, while DAI cannot be unilaterally frozen or forcibly operated, making it difficult to fit within the regulatory framework of the GENIUS Act.
Overall, this type of stablecoin does not rely on banks or centralized institutions, operating logic based on code and smart contracts, making it suitable for users pursuing decentralization. However, due to their "unfreezable and uncontrollable" characteristics, they are also less likely to be accepted by the U.S. government as a legitimate means of payment.
2.3 Algorithmic Stablecoins
Algorithmic stablecoins are a type of stablecoin that relies on algorithms to automatically adjust market supply and demand to maintain price pegs, without relying on real dollar reserves or crypto asset collateral. This mechanism typically adjusts the coin supply through "minting and burning"—when the price falls below $1, the system will "burn" some stablecoins to reduce supply; when the price rises above $1, it will "mint" more stablecoins to increase supply, guiding the price back toward $1.
A typical example is Frax, which adopts a hybrid model, partially supported by real fiat reserves (like USDC) and partially adjusted by algorithmic mechanisms. When the market price of 1 FRAX drops to $0.98, the system will initiate a burn mechanism to reduce market supply and increase scarcity, causing the price to rise.
A previously well-known but ultimately collapsed example is UST (TerraUSD), which is an extreme case of a pure algorithmic stablecoin. UST had no collateral backing; instead, it was pegged to another token, LUNA: 1 UST could always be exchanged for an equivalent amount of LUNA, and vice versa. This mechanism worked well in bullish markets, but once confidence collapsed or large-scale redemptions occurred, it fell into a death spiral: a large number of UST being redeemed led to a sharp drop in LUNA's price, which then spiraled further out of control. In 2022, this resulted in billions of dollars in user asset losses, becoming one of the largest disasters in crypto history.
The GENIUS Act requires all payment stablecoins to be backed by 100% cash or highly liquid assets like short-term U.S. Treasury bonds, ensuring users can redeem them at any time and preventing "de-pegging" or run risks. Algorithmic stablecoins typically lack real asset reserves and rely on market mechanisms and code to adjust supply and demand. This clearly does not meet the GENIUS Act's basic requirement for "100% reserves." Therefore, due to high risks, lack of real reserves, difficulty in auditing, and inability to regulate, algorithmic stablecoins are likely to be excluded from the scope of licensed issuance.
2.4 Yield-Generating Stablecoins
Yield-generating stablecoins are stablecoins that automatically generate returns for users who hold them. For example, USDe is issued by the Ethena protocol. After users buy or hold USDe, they do not need to take additional actions; their assets will continuously grow like "automatically yielding dollars." The underlying principle is that the assets backing USDe are used by the protocol to participate in DeFi lending, staking, and other operations to earn interest, which is then distributed to holders.
However, the GENIUS Act explicitly states, "Prohibited any licensed stablecoin issuer from providing returns or interest to users." This means stablecoins can only be used for payments and transactions, not as investment products that allow users to earn money. Therefore, yield-generating stablecoins like USDe are unlikely to obtain licenses under the current U.S. regulatory framework.
2.5 Others
In addition to the types of stablecoins mentioned above that are directly affected by the bill, other sectors may also be impacted by certain provisions.
The GENIUS Act requires stablecoin issuers to identify and verify user identities. This means all users must undergo identity verification (KYC) before buying, selling, or using stablecoins to prevent money laundering, terrorist financing, and other illegal activities. In this context, on-chain KYC and decentralized identity (DID) projects can play an important role. They can provide a complete set of compliant identity verification tools for stablecoin projects. For example, after a user completes a KYC verification in their on-chain wallet, they can generate an on-chain identity credential or pass for subsequent transaction authorization or compliance audits. Projects like Fractal ID (a Web3 compliance identity verification KYC/AML platform), Quadrata (an on-chain identity passport protocol), and Civic Pass (an identity verification system providing on-chain access control) can help stablecoin issuers quickly identify whether users have completed KYC while protecting user privacy. Users do not need to repeatedly upload identification information; instead, they can prove they are compliant users through on-chain identity credentials, which is both secure and efficient. Additionally, Worldcoin, supported by OpenAI co-founder Sam Altman, is an on-chain identity verification project where users obtain a unique digital identity (World ID) through iris scanning to prove they are "real humans," addressing the issue of identity proliferation in the AI era. Unlike projects like Fractal ID and Quadrata, Worldcoin emphasizes biometric technology and global layout, potentially becoming a key infrastructure in compliance access, anti-money laundering (AML), and qualified investor identification. Furthermore, if stablecoin projects wish to open services to institutions or large users, on-chain KYC/DID can support whitelist mechanisms, allowing only users who have completed KYC to participate in specific transactions, subscriptions, or enjoy higher limits. Overall, on-chain KYC and DID serve as a compliance passport system for stablecoins, helping stablecoin projects meet regulatory requirements while continuing to expand their user base and application scenarios. In the context of gradually clarifying global policies, the value of such infrastructure may become increasingly significant.
Moreover, as mentioned in section 2.4, the bill prohibits stablecoin issuers from providing returns or interest to users, making it difficult for yield-generating stablecoins to comply. However, while stablecoin issuers (like USDC or USDT) cannot directly pay interest to users, this does not mean users cannot earn returns through stablecoins. In fact, many third-party platforms or protocols can use these compliant stablecoins as tools to create returns for users through investment, lending, arbitrage, and other means, such as:
Ethena is a synthetic stablecoin protocol based on Ethereum that issues a stablecoin pegged to $1, USDe, by constructing long spot asset and short perpetual contract hedge positions. Users deposit Ethereum or liquid staking assets (like stETH), and the protocol shorts equivalent perpetual contracts on centralized exchanges to stabilize asset value close to the dollar. Since short contracts incur funding rates, and Ethereum spot itself may also carry staking returns (like stETH), Ethena generates stable profits through this funding rate spread. Users who deposit USDe into the protocol receive a yield certificate token, sUSDe, which automatically accumulates these arbitrage returns over time, effectively becoming a "yield-generating version of USDe." Users holding sUSDe do not need to take action to continuously receive dividends from the Ethena protocol. It is important to note that the returns are not directly paid to USDe holders but are distributed to users holding sUSDe. This design helps the protocol avoid, to some extent, the restrictions of the GENIUS Act that prohibit stablecoins from directly paying interest to users.
RWA yield projects like Ondo Finance's stablecoin USDY are backed by short-term U.S. Treasury bonds and cash equivalents. Users purchase USDY with stablecoins (like USDC), and the funds are used for off-chain investments in U.S. Treasury bonds. The interest income generated is settled off-chain by Ondo and indirectly reflected in the token value through asset appreciation. Note that the interest income generated from U.S. Treasury bonds is not directly distributed to users as interest but is indirectly reflected by increasing the market value of the USDY token. In other words, the USDY tokens held by users will appreciate as the underlying assets generate returns, allowing users to earn through the increase in token value. This method differs from traditional DeFi protocols that directly distribute interest on-chain and complies with the GENIUS Act's prohibition on stablecoin issuers directly paying interest to users. Ondo also emphasizes that USDY is not a traditional stablecoin but a token with asset appreciation characteristics, more akin to an investment product or security.
Decentralized lending protocols like Aave and Compound allow users to deposit stablecoins (like USDC, USDT) into the protocol, which then lends these stablecoins to borrowers. Borrowers pay interest, and depositors receive this interest as returns. The protocol operates through the lending spread, which is the interest rate paid by borrowers minus the rate given to depositors. Since users hold stablecoin assets, the returns generated from deposits essentially come from interest sharing in lending activities, which is considered investment income rather than interest directly paid by the stablecoin issuer. Therefore, it does not violate the GENIUS Act's provision prohibiting stablecoin issuers from paying interest to users. In the future, compliant stablecoins could consider becoming underlying assets in lending protocols, with stablecoin issuers ensuring value anchoring and compliant issuance, while lending protocols utilize these stablecoins for lending matchmaking, achieving asset liquidity and return generation.
There are also some yield aggregation and arbitrage strategy projects. These protocols execute arbitrage strategies across multiple DeFi platforms using the stablecoins deposited by users, such as borrowing and lending between different lending protocols to earn interest rate spreads, participating in liquidity mining to earn rewards, or capturing transaction fees. The profits obtained by the protocol, after deducting fees, are returned to users, helping them achieve asset appreciation. Yearn Finance is a yield aggregator protocol that automatically finds and executes optimal DeFi yield strategies for users. Users deposit stablecoins (such as USDC, USDT, etc.) into Yearn's Vault, and the protocol automatically allocates these funds to multiple DeFi platforms (such as Compound, Aave, Curve, etc.) to participate in lending, liquidity mining, arbitrage, and other strategies. The generated profits continuously accumulate, and the value of the user's Vault shares increases accordingly. Users can redeem their shares at any time, receiving their principal plus the profits generated by the strategy. Here, users hold shares of the Vault after profit growth, rather than ordinary stablecoins, so their source of income is investment returns, not interest directly paid by the stablecoin issuer, thus not violating the prohibition on stablecoin interest payments.
As long as regulatory red lines are not triggered, third-party DeFi protocols can use compliant stablecoins (such as USDC, PYUSD, FDUSD, EUROC) as underlying assets to generate profits through DeFi lending, arbitrage, hedging, etc., sharing the profits with users, effectively achieving "interest on deposits." The GENIUS Act only prohibits stablecoin issuers from directly paying interest to users and does not prohibit other platforms from using compliant stablecoins as tools to design yield products for users. Therefore, there is still significant room for innovation in yield generation around compliant stablecoins.
3. Summary
The introduction of the GENIUS Act will profoundly reshape the entire stablecoin market landscape. It clarifies compliance standards, meaning that in the future, stablecoins like USDC and PYUSD, issued by licensed institutions with transparent asset reserves, will find it easier to gain the trust of users and institutions, being widely used in real scenarios such as payments and cross-border remittances. In contrast, stablecoins with unclear regulatory paths or those that struggle to meet compliance requirements, such as USDT and DAI, may face restrictions on use, decreased liquidity, or even gradual marginalization in the U.S. market.
At the same time, the implementation of the Act may accelerate market consolidation and raise industry thresholds, making it difficult for some small or non-compliant issuers to survive, while low-quality or high-risk stablecoins face elimination. More importantly, the GENIUS Act emphasizes that stablecoins should serve payment and value transfer functions rather than act as financial products or speculative tools, guiding projects back to the essential positioning of "payment tools." Although the market may experience some volatility and adjustments in the short term, in the long run, this Act will help the stablecoin industry move toward a safer, more regulated, and sustainable development path.
References
FACT SHEET: The GENIUS Act Protects Consumers. Link: https://www.banking.senate.gov/newsroom/majority/fact-sheet-the-genius-act-protects-consumers
Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act. Link: https://www.gillibrand.senate.gov/wp-content/uploads/2025/02/GENIUS-Act-Section-by-Section-v3.pdf
S.919 - GENIUS Act of 2025. Link: https://www.congress.gov/bill/119th-congress/senate-bill/919/text
Ethena docs: https://docs.ethena.fi/
Ondo Finance: https://ondo.finance/
Yearn Finance: https://yearn.fi/
Worldcoin: https://world.org/
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