Now, there are two competing bills in Congress. The GENIUS Act and the STABLE Act proposals each bill introduces a distinct approach to regulating stablecoins. Both hope to establish a regulatory environment for digital assets. When it comes to bankruptcy protections, regulatory standards, enforcement, and supervision, they take vastly different approaches. To be sure, both bills are commendable steps toward creating some clear rules of the road for stablecoins. Each one has its pros and cons that may significantly impact the future of this emerging industry.
Bankruptcy Protections: GENIUS Act Offers Stronger Safeguards
GENIUS would deliver a somewhat improved package of bankruptcy protections compared to the more limited STABLE Act. To address this, the GENIUS Act has language that would ensure stablecoin reserves are insulated from an issuer’s bankruptcy estate. This helps deter misuse and protects the value of these stablecoins’ assets, ensuring they’re safe for stablecoin holders.
The GENIUS Act puts holders first in line during bankruptcy proceedings. This greatly increases their likelihood of being made whole should an issuer default. This is accompanied by a substantive right to have the automatic stay lifted procedurally. This allows holders to unlock liquidity faster from their reserves. The GENIUS Act’s most important principle is that it has one overriding goal: restore reserves to contract holders in bankruptcy. It builds a new, vigorous-carrot policy initiative.
The STABLE Act’s bankruptcy provisions are notably vague. That ambiguity may subject holders of any stablecoin more risk in an event of issuer bankruptcy. The GENIUS Act's approach offers a more defined and robust framework for protecting stablecoin holders' assets during bankruptcy proceedings.
Regulatory Standards: A Balancing Act Between Federal and State Oversight
One major difference between the two bills is how each would handle state regulatory standards. The GENIUS Act uses a much looser “substantially similar” standard, which could permit more divergence between state regulations. This approach encourages innovation and flexibility. It would incentivize issuers to relocate to states with more lax regulations—a form of regulatory arbitrage.
As a result, the STABLE Act requires that any state regulatory standard adopted meet or exceed whatever the federal standard may be. This requirement ensures a tough standard of regulatory scrutiny in every jurisdiction. This strategy seeks to avoid a harmful race to the bottom and encourage uniform supervision of stablecoin issuers.
The GENIUS Act includes a foreign issuer loophole that could put US stablecoin issuers at a regulatory disadvantage. This loophole would enable foreign entities to do business under more lax regulations and possibly give an unfair competitive advantage to domestic firms’ competitors abroad. Even where allowing regulatory variation is a concession to the states, such as differing approaches to regulatory standards, there is tension between promoting uniformity and state-level experimentation.
Enforcement and Supervision: Addressing the Challenges of Oversight
On the enforcement side, the STABLE Act provides a more straightforward enforcement tool that would be usable against foreign stablecoins. This is a key provision, as it is crucial to the implementation of the administration’s goal of regulating those that are currently beyond US jurisdiction. The STABLE Act further anticipates robust penalties for failing to comply, thus giving a strong deterrent through the threat of punishment for breaking the regulations.
The STABLE Act is inadequate in calling for sufficient coordinated federal-state oversight of large issuers. Without coordination, this lack of oversight leaves gaping holes in oversight. This creates new challenges for regulators to detect, track, and respond to all emerging risks.
The GENIUS Act would allow them to do just that. It requires dual regulation for those issuers with a market cap above ten billion dollars. This provision aims to ensure that larger stablecoin issuers are subject to comprehensive oversight, mitigating the potential for systemic risk. The GENIUS Act’s enforcement mechanisms are sorely lacking clear definitions compared to the STABLE Act. Tellingly, this is most true where foreign issuers are concerned.
Drafting and Ambiguities: Clarity is Key
Both the GENIUS Act and STABLE Act have serious drafting ambiguities that may lead to legal uncertainty. Specifically, the GENIUS Act as currently drafted creates ambiguity on a number of key issues that could result in interpretive hurdles and costly litigation.
In a like manner, the STABLE Act has substantive drafting holes that would introduce legal uncertainty. These ambiguities would weaken the intent of the legislation and lead to a lack of clarity for regulators and industry actors alike.
Additionally, the STABLE Act fails to address the biggest dollar-pegged stablecoin issuer, Tether. This omission is a big miss that’s difficult to understand. Given its size and influence in the market, Tether is a critical player that regulators should put under a microscope. Addressing these drafting ambiguities and ensuring comprehensive coverage are essential for creating a robust and effective regulatory framework for stablecoins.
