Regulatory Risk in Stablecoin Markets: Investor Due Diligence and Systemic Implications

The stablecoin market, once a shadowy corner of the crypto ecosystem, has emerged as a focal point of regulatory scrutiny and innovation. The passage of the GENIUS Act in July 2025 marked a watershed moment, establishing a federal framework for U.S. dollar-pegged stablecoins and reshaping the landscape for investors and institutions alike. Yet, as regulatory clarity emerges, so too do new risks and complexities. For investors, the challenge lies in navigating a rapidly evolving environment where compliance, systemic stability, and cross-border dynamics intersect.

Investor Due Diligence in a Regulated Era

The GENIUS Act mandates that stablecoin issuers maintain 100% reserve backing with high-quality liquid assets, publish monthly disclosures, and undergo annual auditsThe GENIUS Act: A New Era of Stablecoin Regulation^[1]. These requirements, while enhancing transparency, also demand rigorous due diligence from investors. For instance, the Act prohibits yield-bearing stablecoins but allows platforms like Coinbase and PayPal to offer rewards through servicesGENIUS Act Unleashes New Era for Stablecoins and Crypto ...^[2]. This distinction creates a nuanced risk profile: investors must now differentiate between stablecoins that are inherently non-yielding and those that derive value from ancillary services.

Moreover, the Act's dual-track system-permitting smaller issuers to operate under state frameworks-introduces jurisdictional fragmentation. While states like New York and Wyoming have adopted robust regimesState of Stablecoins, Part 3: The U.S. Regulatory Shift^[3], others may lag, creating a patchwork of compliance standards. Investors must scrutinize not only the federal compliance of issuers but also their alignment with state-level requirements. This complexity is compounded by the Act's three-year phase-out of non-approved issuers, which could trigger liquidity shocks if unregulated tokens lose market confidenceThe Regulatory Tides Bolstering Stablecoins^[4].

Systemic Implications and Financial Stability

Stablecoins pose unique systemic risks compared to traditional deposits. Unlike FDIC-insured accounts, stablecoins lack explicit government guarantees, making them vulnerable to runs if reserve transparency faltersRoad to Crypto Regulation Part 2: Stablecoins^[5]. The GENIUS Act's reserve requirements aim to mitigate this risk, but the absence of real-time redemption rights for all users remains a concernThe GENIUS Act: A Comprehensive Guide to US Stablecoin Regulation^[6]. For example, the Act allows "permitted payment stablecoin issuers" to delay redemptions during "systemic stress," a provision critics argue could exacerbate panic during crisesGENIUS Act passed: What's next for stablecoins and ...^[7].

The broader financial system also faces disruption. Traditional banks worry that stablecoin rewards-offered by platforms like PayPal-could siphon deposits from traditional institutionsThe Regulatory Tides Bolstering Stablecoins^[8]. This shift could weaken banks' ability to fund credit markets, a risk amplified by the lack of capital requirements for stablecoin issuers under the current frameworkHow will the GENIUS Act work in the US and impact the ...^[9]. Meanwhile, the BIS has warned that stablecoins could undermine monetary policy by enabling cross-border capital flows that bypass central bank controlsRoad to Crypto Regulation Part 2: Stablecoins^[10].

Global Regulatory Divergence and Enforcement Challenges

While the U.S. has taken a leading role in stablecoin regulation, global fragmentation persists. The EU's MiCA framework, effective since June 2024, requires 1:1 liquid reserves and segregates customer fundsStablecoins Were Designed To Be Global Liquidity. Here's How^[11], while Singapore and Hong Kong have adopted innovation-friendly but stringent capital safeguardsThe Regulatory Tides Bolstering Stablecoins^[12]. This divergence complicates compliance for global issuers and creates arbitrage opportunities. For instance, a stablecoin compliant with MiCA may still face scrutiny in the U.S. if its reserve composition doesn't meet GENIUS Act standardsThe GENIUS Act: A Comprehensive Guide to US Stablecoin Regulation^[13].

The SEC's recent withdrawal from enforcement actions against major stablecoin issuers like Binance and PayPalThe Regulatory Tides Bolstering Stablecoins^[14] signals a strategic retreat from securities law claims. While this reduces legal uncertainty, it also raises questions about the agency's long-term approach to stablecoin innovation. Investors must monitor whether this shift reflects a broader regulatory consensus or a temporary pause before renewed scrutiny.

Conclusion: Balancing Innovation and Caution

The GENIUS Act has undeniably bolstered investor confidence, with the stablecoin market cap surging to $278 billion by August 2025GENIUS Act Unleashes New Era for Stablecoins and Crypto ...^[15]. However, the new regulatory framework is not a panacea. Investors must remain vigilant about issuer compliance, reserve transparency, and the evolving interplay between stablecoins and traditional finance. Systemically, the market's growth demands ongoing oversight to prevent destabilizing feedback loops, particularly as stablecoins increasingly compete with central bank digital currencies (CBDCs).

For now, the stablecoin market stands at a crossroads: a regulated but still volatile frontier where innovation and risk walk hand in hand. Investors who navigate this terrain with disciplined due diligence will be best positioned to capitalize on its potential while mitigating its perils.