GENIUS Act Imposes Strict Rules on Big Tech in Stablecoin Market

The GENIUS Act, recently enacted, imposes significant restrictions on Big Tech companies and banks in the stablecoin market. The legislation introduces structural and regulatory barriers aimed at preventing these entities from dominating the sector. One key provision, dubbed the “Libra clause,” mandates that non-bank stablecoin issuers establish independent entities that must meet stringent antitrust standards and undergo review by a Treasury-led committee. This committee has the authority to veto launches, ensuring that only compliant entities can operate in the market.

Banks issuing stablecoins are required to operate through legally distinct subsidiaries, maintaining separate balance sheets and avoiding activities like lending, leverage, or risk-taking. This isolation of stablecoin activity from broader bank operations is designed to safeguard the dollar and benefit U.S. consumers and market participants. Issuers with assets below $10 billion can continue under existing state-level money-transmitter laws, but those exceeding this threshold must obtain a national trust bank charter, introducing a compliance barrier to limit unchecked expansion.

The GENIUS Act also bans interest-bearing stablecoins, eliminating yield incentives traditionally used to attract users. Unbacked tokens, similar to the failed Terra project, are now outlawed under criminal penalty provisions. This move is expected to shift institutional demand towards decentralized finance (DeFi) platforms, as regulated stablecoins will no longer offer yield. DeFi protocols on Ethereum may become the primary destination for investors seeking passive returns, with institutions finding these protocols more suitable given the absence of yield within regulated stablecoins.

The legislation, passed with bipartisan support, aims to create legal clarity while preserving consumer protection and market integrity. It introduces amendments to the Bankruptcy Code, offering protections for payment stablecoin holders in the event of insolvency. This provision is crucial for building public trust in stablecoins, ensuring that holders are safeguarded against potential financial losses. The act also prohibits yield-bearing stablecoin products, addressing concerns about tech firms gaining expanded access to financial markets through these instruments.

The GENIUS Act is expected to have a profound impact on the stablecoin market by removing legal ambiguity and encouraging major institutions to enter the sector. This increased participation is likely to drive innovation and growth, further cementing the U.S. dollar's position as a trusted and stable asset in the digital currency landscape. The implementation of the act will take some time, as federal regulators have six months to develop specific regulations. During this period, the public can expect to see further developments in the stablecoin market as institutions adapt to the new regulatory environment. The act's provisions are designed to foster a more transparent and secure stablecoin ecosystem, benefiting both consumers and financial institutions alike.