The GENIUS Act, passed by the US Senate on June 17, 2025, marks a significant step in regulating stablecoins, a type of cryptocurrency designed to maintain a stable value by being pegged to another asset, such as the US dollar. While this legislation is celebrated as a win for the cryptocurrency industry, it raises critical concerns about economic stability and the potential for a global financial crisis. This article explores the implications of the GENIUS Act, its goals, and the risks it may introduce.
What Are Stablecoins?
Stablecoins are cryptocurrencies engineered to minimize the volatility that defines traditional cryptocurrencies like Bitcoin. Here's how they work:
- Pegged Value: Stablecoins are tied to a stable asset, typically the US dollar, at a fixed rate (e.g., 1:1).
- Issuer Guarantee: Companies issuing stablecoins promise to redeem them for the pegged asset's value. For example, one stablecoin equals one US dollar.
- Purpose: They aim to attract cautious investors by offering stability, unlike the unpredictable price swings of other cryptocurrencies.
However, stablecoins are not without risks. A notable example is the 2022 collapse of the Terra stablecoin in South Korea, which erased approximately half a trillion USD from global crypto markets overnight, highlighting the fragility of such systems.
The GENIUS Act: Key Features
The GENIUS Act focuses on regulating stablecoins to provide a framework that ensures their stability and investor confidence. Key aspects include:
- Regulatory Oversight: Stablecoin issuers will be monitored to ensure they hold sufficient reserves to back their tokens.
- Legitimizing Stablecoins: The act aims to make stablecoins a credible financial tool, encouraging adoption by major companies like Amazon and Walmart, which are planning to issue their own stablecoins.
- Consumer Protection: By enforcing regulations, the act seeks to assure investors that stablecoins are safe and reliable.
The GENIUS Act is poised to become the first standalone cryptocurrency legislation signed into law, with the House scheduled to vote on it on Thursday, June 19, 2025.
Potential Risks of the GENIUS Act
While the act aims to stabilize the crypto market, it introduces significant risks that could destabilize the broader economy. Below are the primary concerns:
- Over-Issuance of Stablecoins:
- Companies may issue more stablecoins than their reserves can support.
- If a company's finances weaken, it may struggle to redeem stablecoins, triggering investor panic.
- Economic Ripple Effects:
- A rush to redeem stablecoins could force companies to sell off assets, such as US treasury bills, to cover redemptions.
- This sell-off could lower bond prices, causing a spike in US interest rates.
- A sudden increase in interest rates could lead to solvency crises for banks and governments worldwide, potentially sparking a global financial crisis.
- Regulatory Fallibility:
- Regulators are not infallible, as evidenced by the 2023 collapse of Silicon Valley Bank, which went unnoticed until it was too late.
- Inadequate oversight could allow companies to issue excessive stablecoins, amplifying risks.
- Interoperability Challenges:
- If major companies issue their own stablecoins, compatibility issues may arise. For example, will Amazon's stablecoin be accepted at Walmart?
- Differing values or acceptance policies could fragment the market, confusing consumers and undermining trust.
Comparison to Historical Crises
The risks associated with stablecoins mirror historical currency crises, such as Argentina's peso peg to the US dollar from 1991 to 2002:
- Artificial Stability: Argentina's peg distorted trade with non-dollar economies, leading to an economic crisis.
- Loss of Confidence: When the peg was abandoned, the peso's value plummeted, exacerbating economic turmoil.
- Stablecoin Parallel: If a major company's stablecoin loses its peg due to insufficient reserves, a similar collapse could occur, with far-reaching consequences.
Broader Crypto Legislation: The CLARITY Act
Alongside the GENIUS Act, the CLARITY Act is another significant piece of crypto legislation under consideration during "Crypto Week" in Washington, D.C. Key points include:
- Market Structure: It defines whether a digital asset is a security (overseen by the SEC) or a commodity (overseen by the CFTC).
- Challenges: The act faces hurdles in the Senate due to concerns over conflicts of interest, particularly with President Trump's crypto ventures, including $TRUMP and $MELANIA meme coins and World Liberty Financial.
- Industry Push: Companies like Coinbase and Ripple are lobbying for the CLARITY Act, arguing it will provide regulatory certainty and boost investment.
Additional Legislative Moves
The House is also considering a bill to prevent the Federal Reserve from issuing a central bank digital currency (CBDC), reflecting the crypto industry's preference for private-sector solutions. This bill is expected to pass on Wednesday, June 18, 2025.
Why It Matters
The GENIUS Act represents a pivotal moment for the cryptocurrency industry, offering a path to legitimacy through regulation. However, its potential to destabilize the global economy cannot be ignored. Key takeaways:
- Stability vs. Risk: While stablecoins aim to provide stability, their reliance on issuer reserves makes them vulnerable to mismanagement.
- Regulatory Limits: Past failures, like Silicon Valley Bank, show that regulation is not a foolproof safeguard.
- Global Implications: A stablecoin collapse could trigger a chain reaction, affecting bond markets, interest rates, and global financial stability.
As the House prepares to vote, the world watches to see whether the GENIUS Act will usher in a new era of crypto credibility or sow the seeds for the next economic crisis.