GENIUS Act Restricts Stablecoin Growth Amid Global Tokenization Debates

The signing of the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act by President Donald Trump on July 18 marks a pivotal moment in the evolution of stablecoin regulation and the broader tokenization of global financial systems [1]. The act, which imposes federal and state oversight on USD-backed stablecoins, is the first comprehensive U.S. federal law to address the growing influence of stablecoins in global finance [1]. According to William Quigley, co-founder of WAX and Tether, the act’s regulatory framework may slow the full tokenization of the global financial system, as it allows traditional financial institutions to mimic stablecoin operations without adopting blockchain technology [1].

The GENIUS Act sets reserve and redemption requirements for stablecoin issuers and prohibits the payment of interest on stablecoins, effectively treating them as a medium of exchange rather than an investment vehicle [1]. This approach aligns with the act’s emphasis on transparency and auditability but may limit the efficiency of stablecoins for cross-border payments [1]. Quigley noted that while the act does not mandate the use of blockchain technology, it acknowledges that many stablecoins—such as Tether (USDT)—are already built on various blockchain platforms [1]. The act allows foreign stablecoin issuers, including Tether, to operate in the U.S. under strict conditions, including compliance with U.S. regulatory standards and the maintenance of sufficient reserves [1].

Tether, the issuer of USDT, has been operating in the British Virgin Islands and El Salvador and recently established a physical headquarters in the latter to comply with local digital asset laws [1]. The Digital Assets Issuance Law (LEAD) in El Salvador provides tax exemptions for digital asset-related activities, which may benefit Tether’s operations under the GENIUS Act [1]. The act requires foreign stablecoin issuers to register with the Office of the Comptroller of the Currency (OCC) and ensure their home countries have comparable regulatory frameworks and anti-money laundering (AML) systems [1].

Quigley anticipates that the GENIUS Act will encourage large multinational corporations to explore stablecoin issuance, particularly in corporate finance departments, which could indirectly drive blockchain adoption [1]. However, the complexity of cross-border tax implications may hinder the widespread use of stablecoins for global payments [1]. For instance, stablecoins are generally treated as property by the IRS in the U.S., which means transactions involving stablecoins can trigger both federal and state tax obligations [1]. In many jurisdictions, including the UK, stablecoins are not considered legal tender for value-added tax (VAT) purposes, further complicating their use in international commerce [1].

The act also emerged in part as a response to high-profile regulatory challenges, such as those faced by Facebook’s Diem project, which was eventually abandoned in 2022 [1]. Despite Meta’s pivot away from the project, the regulatory scrutiny it faced contributed to the development of the GENIUS Act and greater institutional recognition of digital assets [1]. Quigley emphasized the importance of large corporations like Meta navigating internal innovation barriers to fully leverage the potential of stablecoins for global payments and digital content distribution [1].

While the GENIUS Act represents a significant step toward stabilizing and regulating the stablecoin market, it does not guarantee a rapid acceleration of global financial tokenization [1]. The lack of mandatory blockchain adoption and the complexity of regulatory and tax frameworks may slow progress, despite the act’s potential to foster corporate interest in stablecoin issuance [1]. Quigley remains open to discussing the implications of future legislation, such as the proposed CLARITY Act of 2025, which aims to further clarify the regulatory landscape for digital assets [1].

Source: [1] Interview | WAX and Tether co-founder on the impact of the GENIUS Act on the tokenization of the global financial markets (https://coinmarketcap.com/community/articles/688f6b320e6e713b25d2a805/)