US Senate Close to Passing GENIUS Act to Stabilize Stablecoins

- The US Senate is nearing the passage of the GENIUS Act, aiming to regulate stablecoins and their reserve practices. - The legislation addresses concerns about the stability of smaller banks due to the conversion of insured deposits into volatile, uninsured assets. On June 15, 2025, Cryptopolitan reported the US Senate is close to passing the GENIUS Act, which seeks to regulate stablecoins and their reserve practices. This legislative move aims to manage stablecoins' impact on the traditional banking system by establishing a legal framework that will detail how issuers create and manage dollar-backed tokens. Furthermore, the act addresses the transformation of low-risk insured deposits into volatile, uninsured assets, a change that poses potential instability risks to smaller banks. The primary concern driving this legislation is that stablecoins convert low-risk, insured deposits into volatile, uninsured assets. Although this conversion does not remove money from the traditional banking system, the shift can destabilize smaller banks, especially under stress conditions. For instance, the March 2023 incident, where Circle faced a $3 billion delay withdrawing funds from Silicon Valley Bank during its collapse, underscores the potential instability of stablecoin reserves. The GENIUS Act will establish a regulatory framework for stablecoin issuers, requiring them to hold reserves in banks, purchase Treasuries, or lend to banks, much like money-market funds. This comprehensive framework aims to manage and mitigate the risks associated with converting low-risk deposits into potentially volatile assets. On June 15, Cryptopolitan and Moomoo, referencing a Wall Street Journal article from the same date, reported that the transformation of retail deposits into volatile corporate cash is a core issue. This is because minting stablecoins with US dollars moves funds from government-insured accounts to large, uninsured accounts, which face the risk of rapid withdrawal during panics. Separately, JPMorgan Chase analysts view stablecoins as digital money-market funds, noting that while this transformation does not destroy bank deposits, it changes their nature and increases risk exposure. Researchers at the European Central Bank (ECB) have also highlighted that collecting deposits from stablecoin issuers transforms stable retail deposits into volatile ones. Consequently, this transformation can potentially weaken a bank's liquidity coverage ratio (LCR). Therefore, this shift towards a more fragile funding structure for banks presents a key regulatory concern. According to Circle's public filings, the company now holds the significant majority of its cash reserves with globally systemically important banks, which can better manage large liquidity swings. However, smaller banks may still face significant negative impacts if people widely use stablecoins for transactions and savings, as such use could erode these banks' strength in government-insured retail deposits. Additionally, in late May 2025, The Wall Street Journal reported that major US banks, including JPMorgan, Bank of America, Citigroup, and Wells Fargo, are in early discussions to launch their own stablecoins. Such a development could further consolidate power within these larger institutions, potentially allowing them to control the stablecoin ecosystem from issuance to reserve hosting. The GENIUS Act, officially the "Guiding and Establishing National Innovation for U.S. Stablecoins Act of 2025," delineates federal and state regulatory roles and sets requirements for issuers, redemption practices, and reserve asset composition. Furthermore, issuers will face disclosure requirements and examinations. The Senate advanced the bill in May and June 2025, indicating progress toward its potential enactment. According to CoinMarketCap, as of June 15, 19:09 UTC, USDC (USDC) was trading at $1, with a 0.8% increase in 24-hour trading volume.