GENIUS Act to Ban Stablecoin Interest Payments, Mandate 1:1 Reserve Backing

The GENIUS Act is set to revolutionize the regulatory landscape for stablecoins in the United States, introducing a comprehensive legal framework that will significantly impact issuers, users, and the broader cryptocurrency ecosystem. This legislation incentivizes stablecoin issuers to obtain banking licenses while imposing strict reserve requirements and prohibiting interest payments on stablecoin holdings.

One of the key provisions of the GENIUS Act is the encouragement for stablecoin issuers to pursue national banking charters. This move, as explained by crypto attorney Logan Payne, restricts companies to "purely stablecoin issuance," a narrow scope compared to the diverse activities many issuers currently undertake. This limitation means that issuers must either confine their operations or seek broader regulatory approval. Obtaining a national trust bank charter from the Office of the Comptroller of the Currency (OCC) is seen as a strategic pathway, enabling issuers to operate across states without needing individual money transmission licenses. This approach, already adopted by firms like Circle and Ripple, offers a streamlined regulatory environment, allowing stablecoin issuers to expand their services while maintaining compliance.

A significant provision within the GENIUS Act bans stablecoin issuers from offering interest or yield to holders. This move directly challenges one of the most popular user acquisition strategies in the stablecoin market, where yield offerings have been used extensively to attract and retain users. For example, Circle’s USDC rewards users holding the stablecoin on major exchanges, a practice now slated for change. Legal experts anticipate that many existing yield arrangements will need to be restructured or discontinued, fundamentally altering the competitive landscape for stablecoin products. This regulatory shift aims to reduce risks associated with high-yield crypto products but may also limit user incentives in the short term.

The decentralized finance (DeFi) sector encounters a period of uncertainty as the GENIUS Act leaves many questions about stablecoin usage within DeFi platforms unanswered. Logan Payne notes that the legislation “intentionally” avoids detailed guidance on DeFi, signaling that further regulatory clarity will be necessary. Future legislative efforts, such as the CLARITY Act, are expected to complement the GENIUS Act by defining digital asset classifications and regulatory responsibilities. Until then, DeFi platforms must navigate a complex and evolving legal environment, balancing innovation with compliance risks.

The GENIUS Act mandates that stablecoin issuers maintain a 1:1 backing of their tokens with US dollars or equivalent monetary instruments like Treasury bills. Issuers are required to publicly disclose the composition of their reserves and submit to regular audits by registered public accounting firms. This transparency measure aims to bolster market confidence by ensuring that stablecoins are fully collateralized and that reserve reports are accurate and verifiable. Additionally, issuers must certify these reports to their relevant federal or state regulators, reinforcing accountability within the stablecoin ecosystem.

Three years post-enactment, the GENIUS Act will prohibit the offering of stablecoins from non-approved issuers within the United States. Foreign stablecoin issuers face stringent requirements to enter the US market, including compliance with the Act’s legal standards and registration with the OCC. The legislation provides exemptions for foreign issuers operating under regulatory regimes deemed comparable by the US Treasury. These issuers must also maintain sufficient reserves in US financial institutions to cover their American customers, ensuring protection and regulatory oversight for US users.

The GENIUS Act establishes a multi-agency regulatory framework involving the Treasury, Federal Reserve, OCC, FDIC, and National Credit Union Administration. It permits various regulated entities—including banks, credit unions, and nonbanks—to issue stablecoins, depending on their charter and size. Issuers with less than $10 billion in stablecoin issuance may opt for state-level regulation, although states are not mandated to create specific stablecoin regulatory bodies. This dual federal-state system aims to balance regulatory rigor with flexibility, accommodating diverse issuer profiles and market dynamics.

The GENIUS Act marks a significant milestone in US stablecoin regulation, introducing robust licensing, reserve, and transparency requirements that will reshape issuer operations and user experiences. While the prohibition on yield payments and the regulatory ambiguity surrounding DeFi present challenges, the Act lays foundational governance for a maturing stablecoin market. Stakeholders should closely monitor forthcoming regulations and legislative developments to navigate this evolving landscape effectively.