GENIUS Act Faces Criticism for Restricting Stablecoin Issuance by Large Firms

The GENIUS Act, currently progressing through the Senate, is seen as a significant opportunity to establish a favorable legal framework for stablecoins, a type of cryptocurrency designed to maintain stable value. This legislation gains added importance as the Trump administration has prioritized cryptocurrency, with Vice President JD Vance advocating for a hands-off approach to economic decisions, emphasizing that the government should not dictate what industries can do.

Financial regulation, according to Vance, should focus on protecting individuals from fraudulent behavior rather than restricting economic activities based on perceived risks. For stablecoins, this means ensuring that issuers have the reserves they claim to maintain a stable value, typically through cash and short-term securities like U.S. Treasuries. However, the current negotiations around the GENIUS Act seem to be moving away from this straightforward approach.

One of the key issues with the GENIUS Act is its restriction on large nonfinancial firms, such as Walmart, Google, and Apple, from issuing stablecoins. This provision is seen as a harmful restriction on competition and a failure to create a neutral regulatory environment. Additionally, the Act proposes the creation of a "Stablecoin Certification Review Committee" comprising the Fed, the Treasury, and the Federal Deposit Insurance Corporation, which would oversee state regulatory regimes for smaller stablecoin issuers. This approach is criticized for potentially violating principles of free enterprise and hindering innovation in the payments sector.

Another concern is the Act's focus on "financial stability" regulations, which require the Comptroller of the Currency to issue regulations to ensure financial stability. This approach is seen as ineffective, as federal regulators have been trying to achieve financial stability for decades without success. Critics argue that this regulatory framework gives federal officials too much discretion to dictate behavior based on potential risks, ultimately prohibiting people from taking risks with their money.

The history of financial regulation has shown that this approach has repeatedly failed to maintain financial stability or protect taxpayers. Critics of cryptocurrency want more government involvement to maintain stability, but this fear of allowing private sector companies to operate freely with people's money is counterproductive. The payments sector already relies heavily on private sector companies, and crypto is a response to the inefficiencies caused by too much government involvement.

Many critics advocate for a fully public system, but a private system with strong property rights and government fraud protection would be superior. Payments systems are not an exception to the superiority of free enterprise. Providing a simple framework for fully backed stablecoins, one that prohibits fraud and makes it easy to verify reserves, should be a straightforward solution. This approach would allow people to determine if the technology is worthwhile, potentially strengthening the payments system and the status of the U.S. dollar.

Members of Congress should recognize that doubling down on the current overly paternalistic and prescriptive federal regime is counterproductive. The current approach trusts regulators' judgment instead of the judgment of people using the markets every day. Expanding this approach will ensure that regular Americans continue to lose their ability to do what they want with their money, without preventing financial crises. It will only deliver more rules and directives that enrich the well-connected and harm regular Americans. Congress can do better by applying Vice President Vance's principles to the rest of the economy.