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The Guiding and Establishing National Innovation for U.S. Stablecoins of 2025, or the GENIUS Act of 2025 (S. 394), passed by the U.S. Senate on June 17, 2025, represents a significant legislative effort to regulate payment stablecoins in the United States. This legislation arrives at a pivotal moment as Tether and other companies seek to expand their presence in the stablecoin market by issuing their own digital assets designed to maintain stable value relative to national currencies. The Act aims to foster innovation while ensuring financial stability, consumer protection, and compliance with existing laws, such as the Bank Secrecy Act. This article provides a detailed summary of the Act, focusing on three critical sections: Section 4 (Requirements for Issuing Payment Stablecoins), Section 8 (Customer Protection), and Section 9 (Treatment of Insolvent Payment Stablecoin Issuers), which collectively outline the regulatory standards, consumer safeguards, and insolvency protections for payment stablecoins.

Overview of the GENIUS Act
The GENIUS Act aims to establish a clear regulatory framework for payment stablecoins, defined as digital assets that are designed to be used for payment or settlement, backed by a fixed amount of monetary value, and not classified as national currencies or securities. The Act seeks to foster innovation in the digital asset space while ensuring financial stability, consumer protection, and compliance with existing laws, such as the Bank Secrecy Act. It delineates responsibilities for both federal and state regulators, establishes criteria for entities issuing stablecoins, and provides mechanisms for oversight, enforcement, and customer protection.

The Act recognizes two primary types of payment stablecoin issuers: Federal qualified nonbank payment stablecoin issuers, regulated by the Comptroller of the Currency, and State qualified payment stablecoin issuers, regulated by state authorities. It also allows subsidiaries of insured depository institutions to issue stablecoins under federal oversight. The legislation sets forth specific requirements to ensure that issuers operate safely and transparently, with robust protections for consumers and mechanisms to address insolvency.

Below, we delve into the key provisions of Sections 4, 8, and 9, which are central to the Act’s regulatory approach.

Section 4: Requirements for Issuing Payment Stablecoins
Section 4 of the GENIUS Act establishes stringent standards for permitted payment stablecoin issuers to ensure the stability and reliability of stablecoins in circulation. These requirements are designed to protect consumers and maintain the financial integrity of issuers. The key provisions are as follows:

Reserve Requirements
Permitted payment stablecoin issuers must maintain reserves backing their outstanding stablecoins on at least a 1:1 basis. These reserves must consist of highly liquid and secure assets, including:

United States coins and currency, including Federal Reserve notes.
Demand deposits or other immediately withdrawable deposits held at insured depository institutions or regulated foreign depository institutions, subject to safety and soundness limitations set by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).
Treasury securities with a remaining or original maturity of 93 days or less.
Repurchase agreements with a maturity of 7 days or less, backed by Treasury securities with a maturity of 90 days or less.
Reverse repurchase agreements with a maturity of 7 days or less, collateralized by Treasury securities on an overnight basis, with overcollateralization to mitigate risk.
Money market funds invested solely in the above-mentioned assets.
Central Bank reserve deposits.
These reserve requirements ensure that stablecoins are fully backed by assets that can be readily converted to cash, thereby minimizing the risk of issuer default and ensuring redemption capabilities.

Prohibition on Rehypothecation
The Act prohibits the pledging, rehypothecation, or reuse of reserves, except for limited purposes related to creating liquidity for redemptions. For instance, Treasury bills held as reserves may be pledged as collateral for repurchase agreements with a maturity of 90 days or less, provided they are cleared by a regulator-approved central clearing counterparty or receive prior approval from the relevant federal or state regulator. This restriction prevents issuers from leveraging reserve assets in ways that could jeopardize their ability to honor redemption requests.

Transparency and Reporting
Issuers are required to:

Publicly disclose their redemption policies.
Establish procedures for timely redemption of outstanding stablecoins.
Publish monthly reports on their website detailing the total number of outstanding stablecoins and the composition of their reserves.
These reports must be examined monthly by a registered public accounting firm, with the issuer’s Chief Executive Officer and Chief Financial Officer certifying their accuracy to the primary federal or state regulator. False certifications are subject to criminal penalties under 18 U.S.C. § 1350(c), reinforcing accountability.

Capital, Liquidity, and Risk Management
Federal and state regulators are tasked with establishing capital, liquidity, and risk management standards tailored to the issuer’s business model and risk profile. These standards aim to ensure the issuer’s financial integrity and ability to meet redemption obligations without imposing excessive burdens. The Act explicitly exempts these standards from the capital requirements of the Financial Stability Act of 2010, allowing regulators to tailor rules to the unique characteristics of stablecoin issuers.

Bank Secrecy Act Compliance
Permitted payment stablecoin issuers are treated as financial institutions under the Bank Secrecy Act, subjecting them to anti-money laundering and sanctions compliance requirements. This ensures that stablecoin transactions are monitored for illicit activities, aligning with broader financial regulatory standards.

Limited Activities
Issuers are restricted to activities directly related to issuing, redeeming, and managing stablecoins and their reserves, such as providing custodial services. Non-stablecoin activities are permitted only with explicit regulatory approval, preventing issuers from engaging in risky or unrelated financial activities.

State-Level Regulatory Option
Issuers with a market capitalization of $10 billion or less may opt for state-level regulation, provided the state’s regulatory regime is substantially similar to the federal framework. States must certify this similarity to the Secretary of the Treasury, with annual recertifications. If a state’s regime is deemed inadequate, issuers must transition to federal regulation. Issuers exceeding the $10 billion threshold must transition to federal oversight within 360 days or cease issuing new stablecoins until compliant.

These provisions collectively ensure that payment stablecoins are issued by financially sound entities with robust reserves, transparent operations, and regulatory oversight, thereby fostering trust in their use as a payment mechanism.

Section 8: Customer Protection
Section 8 of the GENIUS Act focuses on protecting customers who entrust their payment stablecoins or private keys to custodial or safekeeping service providers. These provisions aim to safeguard customer assets from misuse, loss, or creditor claims, ensuring that stablecoin holders are protected in various scenarios.

Regulated Providers
Only entities subject to supervision by a primary federal payment stablecoin regulator, a primary financial regulatory agency under the Dodd-Frank Act, or a state bank or credit union supervisor may provide custodial or safekeeping services for payment stablecoins or their private keys. State supervisors must share relevant information with the Board of Governors of the Federal Reserve System to ensure oversight.

Segregation of Assets
Providers must:

Treat customer stablecoins, private keys, cash, and other property as belonging to the customer.
Take appropriate steps to protect these assets from the claims of the provider’s creditors.
This segregation requirement ensures that customer assets are not used to satisfy the provider’s debts, preserving their integrity in the event of financial distress.

Prohibition on Commingling
Customer assets must be separately accounted for and not commingled with the provider’s funds. However, for convenience, customer assets may be:

Deposited in an omnibus account at an insured depository institution or trust company, holding assets of multiple customers.
Used to settle transactions or cover lawful charges, such as commissions or taxes, related to custodial services.
Commingled in customer accounts as permitted by Board regulations, provided they are still treated as customer property.
These exceptions balance operational efficiency with customer protection, ensuring that assets remain identifiable and secure.

Regulatory Reporting
Providers must submit information to their primary regulator about their business operations and asset protection processes, enabling regulators to monitor compliance and safeguard customer interests.

Exclusion for Hardware/Software Providers
The requirements do not apply to entities solely providing hardware or software to facilitate a customer’s own custody of stablecoins or private keys, recognizing that such providers do not hold customer assets directly.

These measures collectively ensure that customers’ stablecoins and private keys are protected from misuse or loss, enhancing confidence in the custodial services supporting stablecoin transactions.

Section 9: Treatment of Insolvent Payment Stablecoin Issuers
Section 9 addresses the treatment of payment stablecoin issuers in insolvency proceedings, prioritizing the claims of stablecoin holders to protect their financial interests. This section applies to proceedings under Title 11 of the U.S. Code (bankruptcy) or insolvency actions by federal or state banking supervisors.

Priority of Claims
In any insolvency proceeding, claims by individuals holding payment stablecoins issued by the insolvent issuer have priority over all other claims against the issuer. This provision ensures that stablecoin holders are first in line to recover their assets, reflecting the Act’s emphasis on consumer protection.

Bankruptcy Code Amendment
The Act amends Section 507 of Title 11 to grant first priority to claims of stablecoin holders over other claims against a debtor issuer. This amendment elevates stablecoin holders above other creditors, such as unsecured lenders or bondholders, in bankruptcy proceedings.

Debtor Status
Non-depository institution payment stablecoin issuers are explicitly recognized as potential debtors under the Bankruptcy Code, clarifying their eligibility for bankruptcy proceedings and ensuring consistent treatment.

By prioritizing stablecoin holders’ claims, Section 9 mitigates the risk of significant financial loss for consumers in the event of an issuer’s insolvency, reinforcing the stability and trustworthiness of the payment stablecoin ecosystem.

Broader Implications of the GENIUS Act
The GENIUS Act of 2025 establishes a comprehensive framework for regulating payment stablecoins, balancing innovation with financial stability and consumer protection. Section 4 ensures that issuers maintain robust reserves, operate transparently, and comply with anti-money laundering standards, fostering trust in stablecoins as a reliable payment mechanism. Section 8 protects customers by requiring regulated providers to segregate and safeguard assets, reducing risks associated with custodial services. Section 9 prioritizes stablecoin holders in insolvency proceedings, providing a critical safety net for consumers.

The Act also facilitates interoperability by allowing state-level regulation for smaller issuers and requiring federal oversight for larger ones, ensuring scalability and consistency. Additionally, it clarifies that payment stablecoins are not securities or commodities, streamlining their regulatory treatment and encouraging their adoption in financial transactions.

For the general public, the GENIUS Act offers a clear and secure framework for using payment stablecoins, potentially increasing their adoption in everyday transactions. By addressing key risks — such as issuer insolvency, asset mismanagement, and lack of transparency — the Act aims to create a stable and innovative environment for digital payments, positioning the U.S. as a leader in the global stablecoin market.

As the Act moves toward implementation, with an effective date tied to regulatory rulemaking, stakeholders will closely monitor its impact on the financial landscape. The GENIUS Act represents a forward-thinking approach to regulating an emerging financial technology, ensuring that payment stablecoins can thrive while protecting consumers and maintaining financial stability.

Author: Trent V. Bolar, Esq. (LinkedIn Profile)

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