Lawyers Weigh In as Congress Spurs Stablecoin Rush

Watch more: TechREG: Nixon Peabody’s Andrew C. Glass and Gregory N. Blase

When Congress passed the GENIUS Act, it effectively rewrote the rules of how digital money can circulate in the American economy by standing up a policy framework for stablecoins.

Congress’ ambitions were sweeping: to foster competition, catch up globally and clarify the law. Framed as a modernization of payments and an answer to the global stablecoin boom, the law has already set off a scramble among banks, FinTechs and retailers to stake their claims in a new financial frontier.

To hear more, Competition Policy International (CPI), a PYMNTS company, sat down with Andrew C. Glass and Gregory N. Blase, both partners at law firm Nixon Peabody.

“We’ve recently seen a lot of press about how crypto companies, retailers, [and] trustees are all jumping into the marketplace seeking charters from the OCC [Office of the Comptroller of the Currency],” Glass said. “The goal for promoting competition will likely be met.

“Congress wanted to create clarity … and clearly placed regulation of stablecoins within the purview of traditional bank regulators like the FDIC or the OCC,” he added.

“The first difference is the scope of permitted activities,” Blase said. “Congress appears to have wanted to ensure a clear demarcation between regulated banking entities and payment stablecoin issuers.”

In practice, that means issuers can issue, redeem and maintain reserves, but not expand into unrelated activities.

Redefining the Future of Stablecoins

By exempting stablecoins from Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) oversight, the legislation removes a major obstacle for FinTechs. On top of that, the U.S. has long struggled with a fractured regulatory system for payments. FinTechs often need separate money-transmitter licenses in every state. The GENIUS Act could streamline that.

“It sets up a possibility for an entity to register under the act and then provide cross-jurisdiction payment processing …  without having to obtain a separate license in every jurisdiction,” Glass said.

But it’s not just FinTechs that are eyeing stablecoins. Many retailers envision branded stablecoins as a new loyalty currency that can be used for purchases, rewards and even discounts.

“We would not be surprised if major consumer retailers move pretty quickly,” Glass said.

Still, the federal-state balance remains. Treasury, the FDIC, and the Federal Reserve will constitute a committee to certify that state regimes are “substantially similar” to federal standards. For smaller issuers, those with under $10 billion in circulation, state registration may even serve as a regulatory sandbox.

“The state regulation differences could be more of a sandbox and allow for some innovation,” Glass said.

Still, the act’s three-track approval system has prompted concern about regulatory arbitrage. Federal sign-off may blunt the incentive, but not erase it, especially under the law’s one-year rulemaking deadline.

Blase acknowledged the risk but said Congress anticipated it. “The statute spells out complementary rather than adversarial roles for Treasury and OCC,” he said.

At the same time, he said, “Differences in state regulatory regimes could encourage entities to coalesce in jurisdictions where they perceive a more favorable environment.”

With stablecoins excluded from securities and commodities law, consumer protection will shift to the states — and the courts. Early lawsuits could target disclosure practices or claims of prohibited yields.

“That may draw the attention of state regulators or private plaintiffs,” Blase said.

“When there’s a new product that comes online, it often becomes an attraction both from state enforcement authorities and the private plaintiff’s bar,” Glass added. His advice: Proceed cautiously and disclose everything, from yield restrictions to bankruptcy treatment to lack of insurance.

The Road Ahead

The GENIUS Act may not end debate over stablecoin risk, regulation or innovation. But it marks a clear shift from experimentation to institutionalization.

To that point, banks and money transmitters are eyeing stablecoins for cross-border payments. Lower fees and instant settlement could soon drive U.S. consumers to demand stablecoin options for payroll and retail payments.

“You don’t have to wait for the bank in the country where the money is headed to be open for business,” Glass said.

The stakes extend far beyond cryptocurrency. If successful, the GENIUS Act could enable instant, low-cost transactions between consumers, companies and governments. If it fails, it could entrench new forms of regulatory capture or consumer risk.

“It’s an interesting time to be in this space,” said Blase.

“If you’re entering the marketplace, you need to proceed with some caution,” Glass added. “Have proper policies and procedures well thought through in advance. … Make it clear that the product is not insured by the federal government.”