U.S. Senate Passes GENIUS Act Mandating 100% Collateralization for Stablecoins

The U.S. Senate has recently passed the GENIUS Act, aimed at enhancing the stability and oversight of the stablecoin market. The legislation mandates that all dollar-backed stablecoins must be fully collateralized with high-quality liquid assets, such as U.S. Treasury bonds, to ensure their value remains stable and trustworthy.

However, Amundi, a prominent asset manager, has raised concerns about the potential unintended consequences of the GENIUS Act. Vincent Mortier, Chief Investment Officer at Amundi, cautions that the act could inadvertently create a system that competes with the U.S. dollar rather than strengthening it. Mortier argues that while stablecoins backed by the dollar may seem to reinforce the greenback’s role as a reserve currency, they could also act as alternatives to traditional dollar-based systems. If widely adopted, stablecoins may reduce demand for physical dollars, potentially damaging the very dominance they were created to preserve.

The 1:1 backing requirement of the GENIUS Act could boost demand for U.S. Treasuries, as stablecoin issuers will need to hold massive reserves of them. However, Mortier warns that this could also indicate a lack of trust in the dollar’s inherent strength. He questions, “If we need stablecoins to ensure the dollar’s value, what does that say about the dollar itself?”

Moreover, Mortier points out that companies issuing these tokens, whether they are fintech startups or tech giants, have a strong chance of becoming quasi-banks. These entities might handle billions in deposits, process payments, and even offer interest, all while operating outside the mainstream financial system. Mortier argues that such an event could destabilize worldwide payments and create major risks that regulators aren’t yet equipped to handle.

Despite these warnings, the stablecoin market has seen significant growth. The total market for stablecoins is now worth over $254 billion, nearly double what it was in early 2023. Interestingly, 98% of these tokens are pegged to the U.S. dollar. Analysts expect the supply of stablecoins to double again in the next few years, with some predictions suggesting the market could hit $3.7 trillion by 2030. This explosive growth is likely to be fueled by widespread adoption of stablecoins in cross-border payments, as well as in decentralized finance (defi) and corporate treasuries.

Overall, the GENIUS Act represents a step toward regulating the unpredictable aspects of stablecoins. However, Amundi’s warning serves as a clear reminder that the law could unlock new problems and open a whole new Pandora’s box of issues for the U.S. dollar. The potential for stablecoins to act as alternatives to traditional dollar-based systems and the risks associated with quasi-banks operating outside the mainstream financial system are significant concerns that regulators must address.