GENIUS or Not? Senate Passes Major Cryptocurrency Law

The Senate on Tuesday afternoon passed the GENIUS Act, which would standardize regulations for a growing cryptocurrency market, stablecoins. The bill passed on a bipartisan 68-30 vote.

GENIUS Act proponents say it will save money for American businesses and boost the dollar’s value, but opponents call it a “weak bill” that would risk financial stability and Americans’ privacy.

Here’s what the bill would mean for you if it’s passed by the House and signed into law by President Donald Trump.

What Is a Stablecoin?

Proponents of the GENIUS (Guiding and Establishing National Innovation for U.S. Stablecoins) Act claim that standardizing treatment of stablecoins could revolutionize the economy.

But what exactly is a stablecoin?

A stablecoin is a cryptocurrency that is pegged to another store of value—meaning, in theory, one could exchange the stablecoin for that other commodity.

The reserve that the value is pegged to could be anything—gold, another cryptocurrency, or the U.S. dollar. 

What is important is that holders of the stablecoin are supposed to be able to turn in their cryptocurrency for a set amount of this other asset. 

One purported benefit of this setup is that the value of the dollar-pegged stablecoin will be more stable than other cryptocurrencies.

In practice, the great weakness of stablecoins has been that these reserves don’t always actually exist, despite the claims of sellers. 

For example, Tether and Bitfinex, both popular stablecoins, were fined a total of $42.5 million in 2021, partly “for making untrue or misleading statements” about the reserves behind their currencies.

Now, crypto supporters in Congress are trying to push through nationalized regulations to set standards for stablecoin reserves and further integrate them into the financial system.

A Dollar-Strengthener?

As mentioned, one of the main issues with stablecoins in the past was that vendors had misrepresented the dollar reserves behind them. 

The bill’s sponsors say they will fix this by setting market standards for reserves—making sure that stablecoins actually do have dollar-backing.

“At its core, the GENIUS Act is a consumer protection bill,” reads a fact sheet from the Senate Banking Committee.

Sen. Bill Hagerty, R-Tenn., who introduced the legislation, contends that legally requiring adequate reserves for U.S. stablecoins will drive up purchases of Treasury bills, thus protecting the value of the dollar during turbulent times.

“Because the stablecoin is dollar-denominated, that will perpetuate the dollar’s position, the dollar’s dominance as the reserve currency of the world,” Hagerty said in a May interview. “It will also increase demand for Treasury bills here in America.”

Hagerty further explained that this demand would be increased due to the GENIUS Act’s requirement for stablecoins to be backed up by the dollar.

“The stablecoin legislation requires that each dollar stablecoin be backed fully by either a dollar in cash or short-term treasuries. To do that, the stablecoin issuer has to go and purchase short-term treasuries,” the Tennessee senator said.

With the Federal Reserve already taking historically high losses on a balance sheet that is much larger than it was before the 2008 recession, it is vital for the U.S. dollar to remain a good store of value to prevent a debt spiral and keep debt interest payments down.

The bill, in theory, could also drive further use of stablecoins by exempting those currencies from current regulations on securities.

It restricts regulating agencies such as the Securities and Exchange Commission from classifying stablecoins as securities, ensuring that stablecoins do not have to follow SEC rules requiring them to be listed as liabilities.

Almost instantaneous payments

The Wall Street Journal reported Sunday that Walmart and Amazon “have recently explored whether to issue their own stablecoins in the U.S., according to people familiar with the matter.” 

The Wall Street Journal additionally reported that their final decisions would depend on the GENIUS Act’s passage, which would favor stablecoin usage.

Stablecoin transactions have the benefit of being nearly instantaneous, unlike credit and debit cards, which cost retailers billions due to transaction delays and fees.

By encouraging their customers to use a company-issued dollar substitute as opposed to cash, these companies might hope to recoup some of those losses.

That could mean that companies would provide incentives for consumers to use their dollar substitute, such as through a rewards program or discounts.

Hagerty celebrates the idea of modernizing the banking system to make payments almost instantaneous and taking “a lot of friction out of an old, clunky system.”

It will “bring a lot of working capital back to the companies that need it and back into the economy,” he said Tuesday.

Does Bill Ensure Stablecoins Are Backed by Dollars?

The GENIUS Act does increase standards for reserves to back stablecoins. However, that does not necessarily mean that there would always be a dollar on hand to back each stablecoin that represents a dollar.

It requires one-to-one backing for stablecoins with cash, short-term Treasury securities, or repurchase agreements collateralized by Treasury securities.

“It’s not going to be equities [that back up the stablecoins],” Hagerty reassured reporters in an interview, adding: “It’s going to be high-quality, short-term assets—either short-term U.S. treasuries, or cash. I think the majority of it will be U.S. treasuries.”

This means stablecoins would have reserves behind them, but not necessarily an actual dollar on hand for each stablecoin worth a dollar. 

How more widespread use of dollar stand-ins in the U.S. economy would affect the value of the dollar remains to be seen.

The Naysayers

Despite the optimism of lawmakers such as Hagerty, the bill has harsh critics in the Senate.

Sen. Josh Hawley, R-Mo., for example, has called it a “huge giveaway to Big Tech,” who could monitor users’ payments.

“It allows these tech companies to issue stablecoins without any kind of controls,” the Missouri lawmaker said in June. “I don’t see why we would do that.”

Sen. Elizabeth Warren, D-Mass., who calls it a “weak bill,” feels much the same way.

“If this bill becomes law, Congress will be responsible if a handful of giants take control of our money and then access and abuse troves of valuable consumer spending data,” she said during a floor speech in May.

Warren—who before her time in the Senate gained public prominence as an advocate of stronger banking regulations to avert future crises like the 2008 recession—also contended that the bill would introduce instability into the marketplace.

“I am deeply concerned that this bill will directly lead to the next financial meltdown,” she said, hearkening back to Congress’ weak regulation of the derivatives market in the early 2000s, which she partly blames for the 2008 financial crash.

“The GENIUS Act folds stablecoins directly into the traditional financial system, while applying weaker safeguards than banks or investment companies must adhere to,” Warren said, adding: 

Make no mistake: We are likely to see another financial crisis in the coming years. And we are virtually certain to see another set of wild swings in cryptocurrency values.

Warren further contended that the bill lacks protections for consumers who might lose money if there were a run on the stablecoins that left them uncompensated.

But for Hagerty, those disagreements come down to a basic divide over how the economy ought to work.

Those who oppose the bill are “the people who like centralized currencies,” he said in May. “This is a decentralized concept.”

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