Although intended to bring digital payments into a clearer legal framework, the GENIUS Act has prompted warnings from Federal Reserve officials who say gaps in the bill could undermine financial stability and consumer protection. Fed officials, led by Governor Barr, have highlighted that the Act’s definitions are not sufficiently precise, allowing certain digital assets to fall outside regulatory scope, which could create loopholes for products that function like stablecoins but avoid oversight. The legislation’s mix of federal and state supervisory roles raises concerns about uneven standards, as differing rules across jurisdictions may encourage regulatory arbitrage and complicate enforcement. Observers note that without harmonized definitions and explicit coverage, the intended clarity could be weakened, leaving market participants and consumers exposed. This concern aligns with broader issues raised by the STABLE Act and GENIUS Act conflicts over state thresholds and non-US issuers.
The composition of required reserves under the Act presents additional risks, according to the Fed, because permissible assets include uninsured bank deposits and short-term instruments such as overnight repurchase agreements. These types of reserve assets were stressed during the March 2023 banking turmoil, and their inclusion could allow reserve values to fluctuate under stress, prompting runs or redemption pressures on stablecoins. Although the Act authorizes regulators to limit concentrations in uninsured deposits, the absence of detailed, enforceable limits and supervisory protocols could render that authority less effective. Regular audits and reporting are mandated, but their protective value hinges on the rigor of implementation and the capacity of supervisors to detect and respond to emerging vulnerabilities. The GENIUS Act restricts issuers to insured depository institutions, which is intended to reduce risk.
Consumer protection provisions in the GENIUS Act are viewed as weaker than protections for traditional payment methods, with insufficient fraud safeguards and unclear remedies for users harmed by issuer misconduct or failures. The Act permits trust banks to engage in non-custodial principal activities, which could broaden issuer operations beyond conventional boundaries and introduce systemic linkages between commercial activities and payment stability. Finally, the multiplicity of federal agencies and state regulators authorized to supervise issuers underscores the need for coordinated rulemaking, as failure to integrate federal and state rules risks fragmentation, inconsistency, and weakened safeguards across the stablecoin landscape. The Act also establishes a federal framework that preempts state charters for qualified issuers, aiming to centralize oversight and reduce fragmentation. However, the ongoing gridlock and vague promises in bipartisan talks highlight the challenges in delivering a comprehensive and enforceable stablecoin regulatory framework.
