The GENIUS Act gives institutions clarity on stablecoin use — structure without restriction, stability without yield. Issuance is a different story.

Preface

In the blockchain space stablecoins are nothing new, I know this all too well — having spent the last three years working on nothing but blockchain solutions, they have always been an integral part of my ecosystem. But today GENIUS has given a new meaning to the word “stablecoin” and is shifting its use to the prying eyes of our financial institutions. Could institutions actually benefit from them? Might I be at fault for incentivising engagement through my own retail interest (and playing into its ‘hype’)?

What is a Stablecoin?

To the blockchain layman it is first important to outline what makes a stablecoin both stable and on-chain. This at first seems counterintuitive as we would usually associate cryptoassets with instability (e.g. Bitcoin). However stablecoins are a rare deviance from this norm, and are the one constant on-chain. They aim for nominal price parity with currencies, most notably USD in the case of USDC and USDT (Tether), the two most popular coins. Below illustrates their increasing popularity.

GENIUS Provisions?

Taking a look at the GENIUS Act itself and the detailed bill summary from the CRS (Congressional Research Service) we see that the bill really acts as a way to mature stablecoin regulation. Furthermore, it also clearly outlines the definition of a stablecoin — some key takeaways below:

• Stablecoins must maintain 1:1 backing and price parity with the underlying. This means issuers must hold reserves and face regulatory scrutiny or even action if they do not comply. We know stablecoins are not indifferent to “de-pegging” events, as we saw towards the end of 2024 in USDT.
• They cannot deliver a yield. Gaining any yield from a stablecoin is explicitly barred as they are not classified as securities under the bill. Instead regulators consider them cash-like assets which must not accrue interest.

On its surface these two provisions spell bad news for adoption in professional and institutional use cases. But it is important to note that while a yield cannot be derived from a coin itself, there is no reason we cannot derive yield in a transaction that involves a coin. Not to mention issuers can still back coins using a yield-bearing instrument. Reverse repos are explicitly mentioned in the bill for this purpose, where they are outlined as valid backing for a stablecoin reserve.

Does GENIUS Restrict My Use of a Stablecoin?

Short answer: No, long answer: Maybe. The question of whether your use of a stablecoin could be restricted by this bill is much less straightforward than it seems. Taking a look at section (4) clause (11) from S.1582

(11) PROHIBITION ON INTEREST .—No permitted payment stablecoin issuer or foreign payment stablecoin issuer shall pay the holder of any payment stablecoin any form of interest or yield (whether in cash, tokens, or other consideration) solely in connection with the holding, use, or retention of such payment stablecoin.

This is about as clear as it gets. Under no circumstances can we create a stablecoin for the purpose of gaining interest. For an interbank use case, we expect to see financial institutions building on top of stablecoin infra to generate a useful yield. While the bill heavily restricts the creation and management of stablecoins, it little dictates how we ourselves can use them, with few — if any — limitations on this.

So what about those Repos?

Repos fall under this bill in two facets. (1) Under stablecoin reserves and (2) Under use in a financial agreement. Both are allowed, the former is more restricted than the latter. I see the Bill as enabling the following with respect to repos:

1. An issuer can use short-term reverse repos, especially under Treasuries as their 1:1 reserve pool with actual fiat USD. This is great for an institution, preventing ‘dead’ capital sitting around. Though, it is clear that only reverse repo agreements approved by regulators may be used.
2. Under use in a financial agreement. I noted previously that while we cannot create our own coin that yields interest, there’s no reason not to build on top of them. We can use stablecoins in repo agreements, or create our own instruments as an add-on to stablecoins. Critically, this in no way violates the bill.

GENIUS respects the broader financial ecosystem by placing restrictions on the coin issuers, as opposed to the users. It has given us clarity on the issuance of stablecoins, while balancing freedom of their use.

Executive Summary

• The GENIUS Act regulates and defines stablecoins. Requiring 1:1 fiat derived backing and banning issuers giving direct yield to coin holders.
• Institutions and retail users can still derive yield using stablecoins indirectly, like through a repo agreement. They can also build products on top of coins.
• While issuers can still use repos, they can only do so within coin reserves using short-term reverse repos all while under strict limitations of the regulator.
• The bill restricts stablecoin issuance, not the use of stablecoins.
• GENIUS gives clarity which should aid market adoption of stablecoins.

Read more of our pieces on repos here