Miles SmithThe White House recently announced the signing of the Guarding Education on New Innovations for Upholding Security (GENIUS) Act seeking to regulate certain cryptocurrencies and provide enhanced protections for investors and businesses.
The industry-backed measure is the first-ever federal regulatory system targeting stablecoins, a type of cryptocurrency pegged to the value of the U.S. dollar or other assets.
The White House said the new law offers protections for consumers from “nefarious actors in financial markets” through strong reserve requirements.
The GENIUS Act requires 100% reserve backing with liquid assets like U.S. dollars or short-term treasuries and requires issuers to make monthly, public disclosures of the composition of reserves.
Stablecoin issuers must comply with strict marketing rules to protect consumers from deceptive practices. They are forbidden from making misleading claims that their stablecoins are backed by the U.S. government, federally insured, or legal tender, the White House said.
The law requires issuers to grant coin holders priority for repayment in the event of bankruptcies. The measure also mandates issuers abide by some anti-money laundering rules and anti-terrorism sanctions.
Supporters of the GENIUS Act applaud the measure as an effort to regulate a key segment of the cryptocurrency industry, offering safeguards for consumers, allowing entry for conventional financial firms and growing the digital currency market.
Financial technology experts said new regulations unburden consumers from discerning good and bad actors within the stablecoin sector, and open competition between firms based on the quality of their products.
The mandate that firms hold a reserve of assets underlying the cryptocurrency aims to protect consumers, who otherwise risk a failure to cash out their holdings in the event of a rapid, widespread offloading of coins.
Critics of the measure said it amounts to an industry-friendly set of weak regulations that fail to adequately protect consumers and police illicit trading of stablecoins.
However, the bill offers some protections, including a stipulation that “prohibits any member of Congress or senior executive branch official from issuing a payment stablecoin product during their time in public service.”
White House officials also said the bill combats illicit trading by:
- Subjecting stablecoin issuers to the Bank Secrecy Act, which obligates them to establish effective anti-money laundering and sanctions compliance programs with risk assessments, sanctions list verification, and customer identification.
- Improving the Treasury Department’s ability to combat illicit stablecoin activities by enhancing its sanctions evasion and money laundering enforcement capabilities.
- Requiring stablecoin issuers to have the technical capability to seize, freeze or burn payment stablecoins when legally required.
Early guidance for investors and businesses includes potentially adjusting portfolios or risk models to account for:
- Coins or tokens likely to be impacted by new regulations.
- Exchanges or services that may be subject to enforcement actions.
- Due diligence may require checking regulatory risk, not just technical or market performance.
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