The GENIUS Act and the $6.6T Stablecoin Looming Risk: Banking System Under Siege or Overblown Panic?

The U.S. stablecoin market, now valued at $6.6 trillion, has become a linchpin of global finance, enabling cross-border payments, asset tokenization, and decentralized finance (DeFi) ecosystems. However, this rapid growth has raised urgent questions about systemic risk and regulatory arbitrage. The GENIUS Act of 2025, hailed as a landmark piece of legislation, aims to address these concerns by imposing federal oversight on USD-backed stablecoins. But is the act sufficient to mitigate the risks, or does it merely paper over deeper vulnerabilities in the financial system?

The GENIUS Act: A Framework for Stability or a New Layer of Complexity?

The GENIUS Act mandates that stablecoin issuers maintain 1:1 reserve backing with high-quality liquid assets (HQLA), such as cash or short-term U.S. Treasurys, and undergo monthly public attestations and annual independent audits. These provisions were designed to prevent the kind of reserve mismanagement that led to the 2022 collapse of TerraUSD and to align stablecoin operations with traditional banking standards. By restricting issuance to regulated entities-such as OCC-chartered non-banks, insured depository institution subsidiaries, or state-approved entities-the act also aims to reduce the risk of unregulated actors destabilizing the system.

Critics argue, however, that the act's focus on transparency and reserve requirements may not address the structural risks posed by stablecoin "rewards" programs. While the law explicitly prohibits direct interest payments on stablecoins, platforms like crypto exchanges have introduced yield-generating mechanisms that allow users to earn returns by investing reserves in Treasurys or other safe assets. According to a report by the Brookings Institution, these programs mimic traditional banking activities without the same capital requirements or FDIC insurance, potentially leading to a "disintermediation" of community banks and replicating the systemic risks of the 1980s money market fund crisis.

Systemic Risk: A $6.6T Time Bomb or a Misdiagnosed Threat?

The $6.6 trillion figure represents the total value of stablecoin deposits, a sum that dwarfs the reserves of many regional banks. Proponents of the GENIUS Act argue that its reserve and audit requirements have already curtailed the most egregious forms of risk. For instance, pre-GENIUS Act, stablecoins like Tether (USDT) and Circle's USDC held significant portions of their reserves in uninsured bank deposits and even Bitcoin, creating volatility and exposing the financial system to contagion. Post-act, these reserves are now subject to stricter oversight, reducing the likelihood of a repeat of the 2022 crisis.

Yet, the Financial Stability Board warned in October 2025 that stablecoins still pose a "systemic risk to the broader financial system" due to their integration with DeFi platforms and algorithmic stablecoins. Unlike the GENIUS Act's focus on payment stablecoins, algorithmic stablecoins-backed by complex collateral mechanisms rather than HQLA-remain largely unregulated. If a major algorithmic stablecoin were to collapse, it could trigger a cascade of defaults in DeFi lending markets, which lack the liquidity buffers of traditional banks.

Regulatory Arbitrage: The Global Wild Card

The GENIUS Act's success in curbing U.S. risks hinges on its ability to close international loopholes. Prior to 2025, stablecoin issuers exploited regulatory arbitrage by operating in jurisdictions with lax oversight. For example, Japan's 100% reserve requirement for stablecoins contrasts sharply with the pre-GENIUS Act U.S. landscape, where reserves were often opaque. The act now requires foreign-issued stablecoins to meet comparable U.S. standards to operate domestically, but enforcement remains a challenge.

Comparisons with the EU's Markets in Crypto-Assets (MiCA) regulation highlight both convergence and divergence. Like the GENIUS Act, MiCA mandates 1:1 reserve backing and transparency for e-money tokens. However, MiCA's broader scope-covering asset-referenced tokens and imposing stricter capital requirements-creates compliance friction for cross-border issuers. Meanwhile, the UK's upcoming stablecoin framework, which will require reserves to be held in a statutory trust with a third-party custodian, further complicates the global landscape.

The Verdict: Overblown Panic or a Looming Crisis?

The GENIUS Act has undeniably raised the bar for stablecoin regulation, providing clarity for institutions like JPMorgan and Bank of America, which are now exploring stablecoin issuance under the new framework. However, the act's narrow focus on payment stablecoins leaves gaps in oversight for algorithmic stablecoins and DeFi platforms. Additionally, the persistence of yield-generating programs and the lack of global regulatory alignment suggest that systemic risks remain underappreciated.

For investors, the key takeaway is that the stablecoin market is at a crossroads. While the GENIUS Act has mitigated some of the most immediate risks, the $6.6 trillion market's complexity and interconnectedness with traditional finance mean that vigilance is still required. As the Financial Action Task Force noted in 2025, real-time information sharing and cross-jurisdictional coordination will be critical to preventing regulatory arbitrage and ensuring that stablecoins do not become a vector for illicit finance.

In the end, the question is not whether the GENIUS Act is a failure, but whether it is enough. For now, the answer appears to be a cautious "no."