The GENIUS Act: A New Era in Stablecoin Regulation

On July 18, a significant milestone was reached in the cryptocurrency sector with the enactment of the GENIUS Act, a legislation aimed at regulating stablecoins. The implications of this law are vast, potentially reshaping the landscape of stablecoin issuance and distribution, and contributing to the ongoing tug-of-war between regulators and the cryptocurrency industry.

The Future of Stablecoins: An Uncertain Landscape

The key challenge now lies in the forthcoming two-year rulemaking process that will determine the fate of approximately $250 billion in existing stablecoins. The regulations could either steer this capital towards bank-like structures or push it into offshore silos. The outcomes could also influence the positioning of major cryptocurrencies like Bitcoin and Ethereum. As Justin Slaughter, VP of Regulatory Affairs at Paradigm, pointed out, "little known fact—after the legislation is enacted, the real battle begins."

Paradigm’s recent comments on the Treasury’s notice of proposed rulemaking have underscored a central issue: the ability of stablecoin issuers’ affiliates to provide yield to holders. While Congress has already indicated that this practice should be allowed, the Treasury may attempt to impose restrictions following a re-evaluation of existing rules.

The impending rules dictate everything. If regulators have their way, stablecoins may devolve into conventional banking products; however, if the industry prevails, it could maintain the ability to offer competitive yields that rival banks.

When Compliance Becomes Mandatory

The GENIUS Act initiates a three-year compliance timeline starting from its enactment. The framework officially comes into effect either on January 18, 2027, or 120 days post-final regulations, whichever occurs first. Thus, all involved federal agencies have until July 18, 2026, to publish regulations that will define how stablecoins can operate under the new law.

Between now and mid-2028, U.S. exchanges, custodians, and numerous DeFi platforms will only be able to offer "payment stablecoins" issued by permitted issuers. For those under $10 billion, approval can be sought through state regimes, whereas larger issuers must transition to the federal regulatory framework.

Understanding What "Into Banks" Really Means

The GENIUS Act delineates a new category known as "payment stablecoins," limiting U.S. distribution to coins that are issued by approved entities such as bank subsidiaries or federally licensed nonbank institutions. Only reserves stored in highly regulated assets like cash, bank deposits, or Treasury bills are permissible, with monthly disclosures required and full compliance demanded for all issued stablecoins.

The potential consequences for the $304 billion stablecoin market are profound. Distribution will likely shifts towards those stablecoins that meet federal regulations, effectively creating a bifurcation in the market. Consequently, offshore issuers may still operate but with a reduced capacity to integrate seamlessly with U.S. platforms due to potential liability concerns.

The Battle Over Rules: Yield, Definitions, and Scope

A crucial focal point in this fight is the concept of affiliate yield. The GENIUS Act explicitly prohibits issuers from offering interest, yet it does not restrict affiliate companies from doing the same. Paradigm contends that restricting affiliate yield would violate the Act’s plain language and stifle competition.

Several other points of contention include defining what constitutes a "digital asset service provider," the applicability of DeFi protocols under statutory carve-outs, and establishing "comparable regime" parameters for foreign issuers. This could allow regulators to shape GENIUS into a framework that fortifies existing banks while limiting non-compliant entities.

Identifying Winners and Losers

In this evolving regulatory landscape, large U.S. banks and quasi-bank stablecoin issuers appear positioned to benefit the most. The GENIUS Act establishes a clear federal pathway for institutions to issue digital dollar equivalents while circumventing state-level regulations. This has prompted firms like Circle, Paxos, and PayPal to race toward securing their status as permitted issuers. The long-term expectation is a shift towards tokenized bank deposits that operate on blockchain infrastructure.

Notably, the U.S. dollar and Treasury market may also gain an advantage as the Act mandates that stablecoins must be one-to-one backed by Treasury bills, creating a mini T-bill fund for each compliant stablecoin.

However, the repercussions for offshore issuers and smaller, experimental projects may be severe. By mid-2028, U.S. platforms will not be able to offer any payment stablecoins from entities not recognized as permitted issuers, likely pushing many out of the market.

How Capital Flows Will Change

Three phases of regulatory adjustment are expected as the GENIUS Act unfolds. Initially, from now until mid-2026, industry players will jockey for position, lobbying over reserve eligibility, definitions of foreign comparability, and the allowance of affiliate yields.

The second phase will span 2026 to 2027 as the regulatory structure becomes concrete, leading to the finalization of rules. By the third phase, running from 2027 to 2028, compliance will become critical, with U.S.-facing exchanges prioritizing compliant stablecoins.

The Impact on Bitcoin and Ethereum

The enactment of the GENIUS Act presents a narrative tailwind for Bitcoin. As the market becomes increasingly bank-like amid U.S. regulation, Bitcoin shines as a censorship-resistant alternative outside of this regulatory sphere. While permitted stablecoins will dominate liquidity in compliant exchanges, it’s likely that Bitcoin may experience increased trading pairs as noncompliant stablecoins dwindle.

For Ethereum, the GENIUS Act might catalyze unprecedented scalability if recent trends continue. Regulated issuers favoring EVM networks bode well for Ethereum-based infrastructures, enabling the cryptocurrency to solidify its role as the backbone of stablecoin payments and tokenized assets.

The potential development of a tiered DeFi ecosystem would create a clear divide: the first tier includes permissioned pools backed by institutional capital, while the second tier could remain open to all cryptocurrencies, albeit carrying higher risks associated with censorship.

Conclusion: A Regulatory Tug-of-War

As regulators finalize the rules governing stablecoins, the stakes have never been higher. The Treasury, OCC, and other agencies must lay the groundwork within the next couple of years. Once the dust settles around the GENIUS Act, market participants will need to navigate the new normal where capital flows align with the expectations of regulators, banks, and blockchain protocols. The battle over definitions and rules is just beginning, and how this environment evolves will have long-lasting effects on the cryptocurrency landscape.