GENIUS Opportunity (Robert T. Smith Commentary)

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Passed last month with bipartisan support in Congress, the Guiding & Establishing National Innovation for U.S. Stablecoins (GENIUS) Act establishes a framework for the issuance and regulation of payment stablecoins backed by the U.S. dollar.

Effective upon finalization of implementing regulations, the law should simplify and provide certainty to the crypto experience for commercial banks and their customers. Payment stablecoins are digital currencies designed to be used as a means of payment. They are backed entirely by liquid assets, which are redeemable at a fixed value. This new clarity should greatly enhance the adoption of stablecoins as methods of payment. The law also confirms that payment stablecoins issued by an approved issuer will not be classified as either securities or commodities under federal law.

The law establishes a structure for companies to become licensed as “permitted payment stablecoin issuers.” These issuers include U.S.-based companies that are subsidiaries of an insured commercial bank or credit union and other entities approved by the applicable federal or state regulatory agency. Nonbank entities with outstanding stablecoin issuance of $10 billion or more are required to register with the Office of the Comptroller of the Currency. Smaller issues may opt for state regulation. For banks planning to issue stablecoin, the institution’s primary federal regulator will oversee the activity.

Each approved issuer will be required to maintain reserves backing the issuer’s payment stablecoins (on a one-to-one basis), with reserves consisting of high-quality liquid assets such as U.S. currencies, funds held as demand deposits at insured banks, certain short-term Treasuries and money market funds. Issuers are required to establish procedures for timely redemption of stablecoin and must comply with capital and liquidity requirements.

The GENIUS Act represents a significant step in positioning the U.S. as a leader in crypto regulation. The legislation provides a secure framework for innovation and growth in the stablecoin market. Several large financial institutions are exploring proprietary payment stablecoin issuances for money transfers and other financial transactions. Proponents contend that the law may enhance funding sources for banks in the form of large, concentrated deposits from stablecoin issuers and that the prohibition on paying any yield or interest on stablecoins will limit the pressure on core deposits.

However, a common concern is that the law will result in a significant outflow of traditional bank deposits to stablecoins. Many observers expect that the newfound clarity, and anticipated stability, will encourage many previously hesitant bank customers to enter the digital arena. That shift could have a sizable impact on the deposit base of commercial banks.

Additionally, many observers are concerned that large technology companies with significant user bases could effectively become the bank of choice for those customers. The worst-case effect could see banks experiencing lower liquidity levels while simultaneously incurring higher funding costs. In recent years, commercial banks have faced increased competition from nonbank lenders. The GENIUS Act may introduce similar competitive pressure on the deposit side.

Robert T. Smith leads the finance and commercial transactions practice group at Friday, Eldredge & Clark. He advises financial institutions and companies on regulatory compliance, corporate transactions, and emerging issues in financial technology, including digital assets and payment systems.