How the new "Genius Law" on Stablecoins is leading to the creation of a shadow money supply

The value of all crypto-assets crossed $4 trillion dollars. Of that, 60% ($2.4 trillion) is accounted for by bitcoin. Arbat Capital Advisory Services Limited (UK) analyst Alexei Golubovich and Arbat Capital analyst Denis Chigarev believe that the GENIUS Act, passed in July in the U.S., is not only about stablecoins, but also about how to help the U.S. economy and increase the attraction of money into U.S. Treasuries;

What grounds do the initiators of the GENIUS Act have for claiming that a law to regulate stablecoins will help increase the attraction of investor money into US Treasury bills and generally help the US economy? The analysis shows that the arguments boil down to the following: 

- The GENIUS Act could create a regulated, and therefore attractive, market for stackablecoins for institutional investors.

-  The growth of the stablecoin market will "strengthen the global role of the dollar" by tying even more foreign cryptocurrency users to the USD through some form of "stablecoins."

-  All of this will help increase demand for US Treasury bills in the US and globally.

Thus, the main goal in the coming years is to increase demand for U.S. Treasury bonds. The law should help the government, not the Fed, whose role in regulating financial markets the Trump government wants to reduce, to sell investors the main instrument of financing the US budget. With the current record volumes of debt issuance, only the growth in demand will reduce bond yields.

How do they plan to get demand growth? All existing and new dollar-linked stablecoins will become regulated and can be referred to as "collateralized UST-bills." That is, the law explicitly says that all licensed stablecoins must have 100 percent backing exclusively in the form of U.S. cash dollars and short-term Treasury bills (US T-bills). Monthly public reporting of reserves is mandated. This will force issuers, even the likes of Circle, Paxos, and other major players, to hold a portion of reserves in Treasuries. Although these issuers of USDC and USDT dollar-stablecoins already hold significant amounts in short-term US government bonds.

Thus, the legalization of stablecoins, which require reserves in UST-bills, will make government bonds more sought after by private issuers of cryptocurrencies and  "digital assets", which will mostly start to be called stablecoins and move into the US regulated environment.

It is believed, although as yet unproven, that if dollar-stablecoins are regulated in the US, they will be almost universally used in international trade. This would increase the global influence of the dollar while reducing the risks of a shift to other digital currencies, particularly the "digital yuan" or cryptocurrencies outside the perimeter of U.S. regulation.

Thus, with the largest market share of digital assets among developed countries, the U.S. will be able to take the lead in the digital currency infrastructure for a long time to come.

If any emerging markets use dollar-backed stablecoins in international trade, the demand for the dollar will also increase.

Thus, the dominance of dollar-linked stablecoins will enhance U.S. competitiveness in the global financial system. This is the long-term goal of the current reforms.

A few more provisions in the GENIUS Act that should integrate stablecoins into the U.S. and global financial system, increasing demand for the dollar and Treasuries:

- Two licensing regimes are being introduced: a federal bank charter license (through the OCC, i.e., through the regulator overseeing national banks in the U.S.) and a special license for non-financial issuers overseen by the regulator.

- In the event of the issuer's bankruptcy, token holders will receive their funds before other creditors.

-  Marketing restrictions - prohibiting the issuance of a stablecoin for any foreign "government-backed" currency (e.g., with a deliberately undervalued exchange rate).

- Mandatory verification of transactions in stablecoins by financial institutions (KYC), which would require issuers subject to the Bank Secrecy Act to freeze or liquidate their tokens (including pending a court order).

- A transitional 18-month grace period for existing stablecoins: during this time, issuers must obtain a new license and bring their operations into compliance with the new law.

One of the main objectives of the GENIUS Act is that the law will give legal certainty to companies that want to issue or use stablecoins. This will help attract startups, investments and talent to the U.S. jurisdiction rather than to other countries or offshore. Accordingly, it could provide increased tax revenues to the U.S. Treasury. 

And because the law only allows issuers that meet reserve, audit, and liquidity requirements to register, it reduces the risk to consumers (primarily U.S. taxpayers) purchasing cryptocurrencies for settlement.

Another effect of the law is the accelerating digitalization of finance, turning settlements into a tool for constant surveillance. The law de facto paves the way for total control over money flows - both within the U.S. and in international transactions that use U.S.-jurisdiction compliant stablecoins. 

Other goals of the GENIUS Act and related new laws, which the proponents do not declare, are to reduce the role of the Fed as well as the U.S. Securities and Exchange Commission (SEC) in the market for digital assets.

The new crypto legislation includes the Anti-CBDC Surveillance State Act (Act Against the Central Bank Digital Dollar - Means of Total Control), it effectively banned the Fed's retail digital currency, CBDC. Once it is passed, the Fed may not issue CBDC directly to citizens, including through financial institutions, or use CBDC as a monetary policy tool. Any CBDC project will be possible only on the basis of a separate act of Congress.

That the law is aimed at reducing the influence of traditional financial market regulators was not hidden by the Republican majority. "If central bank digital currency (CBDC) is not inherently open, decentralized and truly private - with a capital "C," just like cash - it will become nothing more than an Orwellian surveillance tool that will be used to undermine the American way of life," said the bill's author, Congressman Tom Emmer, at the hearing.

The Clarity Act distinguishes the jurisdictions of the SEC and the U.S. Commodity Futures Trading Commission (CFTC), removing a gray area for token projects. The CFTC considers bitcoin and ether to be commodities, not securities, and thus supervised by it, not the SEC. This removes a major barrier to launching tokens and other digital assets without SEC oversight.

The laws prescribe a simple criterion for admission to circulation (decentralization) - a blockchain is considered "mature" if no person controls more than 20% of the issued codes. In this case, the project does not fall under the jurisdiction of the SEC, and thus can avoid costly registration.

As a consequence, raising money from any investors is extremely simplified - up to $75 million a year can be raised without "normal" registration with the SEC. You only need to disclose a roadmap and a business plan.

A dual registry of trading venues is created: exchanges and brokers are registered with the CFTC (spot market) or SEC (investment contract registration).

Legalization of self custody - the law guarantees the right of citizens to keep assets in any private wallets: regulated "depositories" are not needed. 

The separation of SEC and CFTC listing functions allows even speculative tokens, including memcoins, to be registered as long as they do not formally violate the rules. 

The new law allows for the creation of an uncontrolled shadow money supply, legitimizing institutional flows in this direction - something that was previously categorically prohibited. In terms of demand for UST-bills, it is still difficult to assess this threat in money: so far, only a quarter of a trillion dollars worth of stablecoins have been created.

The law could loosen controls on the state of the U.S. financial system because huge issuance transactions involving UST-bills would be able to take place outside the control of the Fed and the U.S. financial system in general, reducing the fees of banks and intermediaries. 

Judging by the "spirit" of the GENIUS Act, the U.S. is betting on stablecoins as a "private digital dollar" instead of a government monopoly on digital currency linked to the national currency. China, the EU and other countries are likely to follow this path in state regulation of digital assets. The new U.S. law avoids the Chinese model of financial monitoring and preserves the possibility of private initiative development. At the same time, it increases the risks of issuing stablecoins by crypto-fraudsters, sometimes legitimizing dubious schemes, such as the issuance of "Trump Coins" and other Pump&Dump crypto-assets. 

In a mass financial panic - whether among "cryptocurrency luddites" or in the broader sector - issuers of stablecoins would be forced to sell off their reserves in UST-bills en masse. Such a sell-off could cause a destabilization of the government debt market. As was the case in 2022 with TerraUSD, when the algorithmic stablecoin collapsed and investors began a massive sell-off, 

If all institutions capable of doing so (primarily the Fed, SEC, FBI) are involved in eliminating such risks, it is possible that the GENIUS Act will yield positive results in terms of the main goal for the next 1 - 2 years. Further development will depend on the macroeconomic cycle and the willingness of the U.S. government to continue working on improving the regulation of the digital asset market in the interests of all categories of investors.

This article was AI-translated and verified by a human editor