CrypToad

Notes on the Genius Act – effective 6/2028

Guiding and Establishing National Innovation for U.S. Stablecoins Act

*pstablecoins=Payment Stablecoins

*ppstablecoin issuer= permitted payment stablecoin issuer

“It shall be unlawful for any person other than a permitted payment stablecoin issuer to issue a payment stablecoin in the United States”

What is a payment stable coin- a digital asset that is used as a payment in settlement that the issuer of which makes the representations they will convert/redeem/repurchase in the future and that the value will remain stable relative to a fixed amount of $USD. A payment stable coin is NOT a security.

DELEGATION- Sec. of Treasury makes the rules; has authority to block, restrict, limits Tx’s that involve pstablecoins that are ties to USD

Unless a digital asset service provider is a permitted payment stablecoin issuer, they may not offer/sell a payment stablecoin. Exception for foreign institutions is stringent (including having reserves in the U.S.)

Safe Harbor

• made available by Sec. of Treasury if in the scope and spirit of the Act, and Tx volume is de minimis—unusual circumstances must be disclosed by Sec. of Treasury to other heads
•  

Penalty-seems light—Max 1 Mil $ or 5 years (or both)

Non compliant (foreign) digital assets =/= cash for regulatory req’s of financial institutions

Exemptions

• Direct transfer of assets between two people w/o an intermediary
• Transfer of assets between accounts belonging to one individual (if accts on same platform)
• Any Tx that facilitates one’s own custody (among their own wallets)

1. Requirements For Issuing Pstablecoins

Requirements for permitted pstablecoin issuers

• Must Hold Reserves on a 1:1 basis as:
  • USD or credit in a federal account
  • Funds held as demand deposits or shares held at insured depository inst’s.
  • Treasury bills, notes, bonds w/ 93 or less days till maturity
  • Money promised in a repurchase agreement
  • Over-callateralized Reverse Repo agreements
  • …
  • Any tokenized form of any of these forms of reserve
• Publicly disclose redemption policy:
  • “establish clear and conspicuous procedures for timely redemption of outstanding payment stablecoins”
    • A number of regulators may set a limit on timely redemption
  • Publicly, clearly, and conspicuously disclose in plain language all fees associated with purchasing or redeeming the stablecoin

• Publish Monthly reports
  • Info including stablecoins issued total, reserve composition, and even “including the average tenor and geographic location of custody of each category of reserve instruments.”
  • Reports must be certified by public accounting firm
  • Report accuracy must be signed off by CEO & CFO to be reviewed by Federal pstablecoin regulator or the state pstablecoin regulator
  • Penalty: knowingly signing off on inaccurate reports subject to same penalty as above

• NO Pledging, rehypothecating, or reusing reserves
  • Exceptions include settlement processes on reserves and meting margin req’s on reserve assets
• Capital, liquidity, risk mgmt. req’s
  • Primary fed stablecoin regulator shall make (tailored & not one-size-fits-all) regulations for:
    • Cap requirements
      • Tailored to business model/risk profile of the issuer
      • “sufficient to ensure the ongoing operations of permitted payment stablecoin issuers”
      • If Fed regulators determine a capital buffer is required to ensure that, they can tailor extra buffer req’s for an issuer
    • Liquidity standards- (?)
    • Reserve asset diversification- including interest % risk mgmt.
    • “Appropriate operational, compliance, and info tech risk management requirements and standards, including Bank Secrecy Act and sanctions compliance standards..”
• Tailored natured
  • Primary Fed pstablecoin regulators may tailor & differentiate among issuers based on individual or categorical basis, taking into account financial profile and more.
• Depository holding institution cap requirement rules if they own/control a pstablecoin issuer:
  • Are not required to have any extra capital requirements for those pstablecoins other than those already placed on them by primary regulator
• Treatment under BSA/sanctions laws
  • A permitted pstablecoin issuer is treated as a financial institution under the BSA
  • Implications:
    • Have a good anti laundering program setup
    • Retain certain records
    • Monitoring/reporting suspicious activity
    • Technical abilities to restrict/freeze/reject Tx’s that violate fed or state law/rules/regs
    • Maintain customer ID and verification of anyone who has an account with the ppstablecoins issuer
    • Maintain sanction compliance program
• Limitation on actions of ppstablecoin issuers
  • May only:
    • Issue payment stablecoins
    • Redeem pstablecoins
    • Manage related reserves
    • “provide custodial or safekeeping services for payment stablecoins, required reserves, or private keys of payment stablecoins”
• Other activities allowed
  • Digital asset service provider activities and pstablecoin activities provided these activities are authorized by the Fed/state  primary regulator “provided that the claims of payment stablecoin holders rank senior to any potential claims of non-stablecoin creditors with respect to the reserve assets”
• Cannot
  • Force other services upon a customer in order to access pstablecoin services of the issuer
  • Market a pstablecoin or asset in a way that makes a person reasonably believe the asset or currency is legal tender
    • Except when an asset is pegged to legal tender—then that prohibition on using USA or USD is void
  • Give interest or yield of most any kind pstablecoin holders/users
• Audits and Reports
  • Ppstablecoin issuer with more than $5 billion in total issuance, that isn’t subject to Securities and Exchange Act, must make an annual financial (audited) statement, that includes “the disclosure of any related party Tx’s” (??)
    • These must be made available publicly and submitted to the primary regulator
• Issuance prohibition on non-financial services companies
  • A public company (SEA filer) not predominantly engaged in 1 or more financial activities may not issue a pstablecoin WITHOUT unanimous vote from Stablecoin Certification Review Committee. Committee criteria:
    • Can’t impose a risk to U.S. banking/financial stability of the U.S. or the Deposit Insurance Fund
    • Must comply with fairly strict data use limitations
    • Committee must issue Interpretive Rules within one year

• Regulation by Comptroller

[…]

• State-Level Regulatory Regimes
  • A pstablecoin issuer with less then $10 billion in issuance may opt for a state regulatory regime, provided the state level regulatory regime is substantially similar to the federal framework under the GENIUS Act
  • Thru notice and comment rulemaking, Sec. of Treasury must enact principals for determining whether a state level regime is substantially similar
  • To be certified by state pstablecoin regulator and sent to federal SCRC, who only certifies with unanimous consent, otherwise
    • rejected with explanation:
      • If a certified state regime materially changes, the changes must promote a safe and sound operation of state qualified pstablecoin issuers
      • 180 days to cure rejection
      • If second denial, may appeal to second district in D.C.
  • Passing the $10 billi outstanding issuance threshold
    • If issuer is a state-chartered pository institution, the issuer must transition to the reg. framework of the primary federal pstablecoin regulator by way of federal/state pstablecoin regulator joint effort (state continues to regulate)
    • If issuer is non-state-chartered depository institution, they must transition by way of state pstablecoin regulator and comptroller working together.
  • Waiver from forced transition
    • Primary federal pstablecoin regulator considers:
      • Capital and past operations and examination history of the state qualified issuer
      • Experience of the state pstablecoin regulator
      • The state’s actual regulations and guidance with respect to pstablecoins and digital assets
    • De Facto Waiver: a state qualified issuer is exempt where the state’s regime is enacted quickly and certified and the issuer is qualified
• Other (Insured status, marketing, …)
  • Stablecoins cant represent to be backed by full faith and credit of US nor the FDIC
  • No marketing an asset as a stablecoin unless they are issued pursuant to the Act
  • No financial felons may serve as officers or director of pstablecoin issuer

• Permitted status of insured depository institution subsidiaries, Federal Branch (of a foreign entity-regulated by OCC), nonbank entity, or uninsured nat’l bank
  • Factors of consideration for approval by primary Fed pstablecoin regulator:
    • IF applicant can manage financial requirements set forth in section 4
    • Whether any officer or director is a financial criminal
    • Competence, experience, integrity of the officers/directors/shareholders
    • Has redemption standards listed above (4a1B)
  • Hearing before the primary federal regulator is allowed on appeal, then a final determination is made
    • If no decision is made in time it is an approval automatically
  • States have full ability to regulate the same entities—subsidiaries, state-chartered credit unions, etc
  • Reasonable AML/KYC is required
    • “REFERRAL TO ATTORNEY GENERAL. If a Federal payment stablecoin regulator or State payment stablecoin regulator has reason to believe that any person has knowingly violated (AML certification procedure) the applicable regulator may refer the matter to the Attorney General or to the attorney general

• Supervision and enforcement from Federal regulator
  • For non-state regulated issuers with LESS than $10 billion outstanding:
    • Report may be requested by regulators that must include:
      •  Financial conditions of regulator, risk mitigations plans, compliance with the Act
    • Suspension/revocation grounds for these entities:
      • Willful and reckless violation of
    • Federal regulator can demand third-party affiliates of issuer are prohibited from participating
• Civil Money penalties
  • Any non-permitted issuer and all knowing participants (institution-affiliated participants) are subject to a $100k fine every day that the pstablecoins are issued
  • 1^st tier: all other material violations of the act, regulations, or written agreements is $100k max liability
  • 2^nd tier: in addition to 1^st tier, all knowing violations of the Act/regs is an additional up to $100k a day

• State qualified pstablecoins issuers
  • State has all supervisory, enforcement authority over state regulated entities
  • a state regulator can sign an agreement (MOU) with the Fed Reserve Board to allow joint oversight, examination, or enforcement of a stablecoin issuer.
  • Board oversight
    • If the Board determines “unusual and exigent circumstances” exist, they may take an enforcement action against a State pstablecoin issuer or an institution-affiliated party for violations of the Act
    • If the Board determines that any activity of a state pstablecoin issuer constitutes a serious risk to the financial stability of the issuer, the Board can impose limited restrictions (including redemption limitations)
  • Comptroller oversight
    • Substantially similar to Board oversight but for comptroller supervised issuers, like non-bank entities

• AML
  • Sec. of Treasury authority over foreign pstables
    • Foreign issued pstablecoins cannot be sold/offered in the U.S. “unless the foreign issuer has the capability to comply and complies with the terms of any lawful order.”
    • The Sec. of Treasury has authority to designate any foreign issuer in violation as “noncompliant”, subject to appeal at D.C. ct. of appeals
      • If no compliance occurs within 30 days, Secretary must publish noncompliance in the Fed Register, and prohibit digital asset service providers from facilitating secondary trade of the coin.
        • Violation for a digital asset service provider: $100k/day max
        • BUT a waiver is available to secondary trade of foreign pstablecoins if Secretary deems it necessary
    • Intelligence heads may waive this section regarding activities involving law enforcement or intelligence activities
• AML Innovation
  • Sec. of Treasury must issue public comment to identify techniques and methods to detect illicit activities.
  • FinCEN then will research methods discussed in the public comment with the treasury and evaluate the novel methods based on several factors (Namely-improvement in institutional ability to track illicit activity)
  • No later than 3 years after the Act is passed, FinCEN must issue Notice and Comment Rules relating to (among other things):
    • “Standards for payment stablecoin issuers’ systems and practices to monitor transactions on blockchains, digital asset mixing services, tumblers, or other similar services that mix payment stablecoins in such a way as to make such transaction or the identity of the transaction parties less identifiable.” (TORNADOCASH!)
    • “Tailored risk management standards for financial institutions interacting with decentralized finance protocols.”
  • SoT reports to congress:
    •  includes, among other things, recommendations relating to the scope of the term “digital asset service provider”
• Sec. 10: custody requirements
  • Custodial/safekeeping of pstablecoin reserves, pstablecoins used as collateral, and private keys of the pstablecoins must be done by someone supervised under existing financial institutional laws
  • Stablecoin owners are preferred creditors and prioritized under law regarding custodians
• Insolvency of pstablecoin issuer
  • Direct pstablecoin holders have priority over the claims of the pstablecoin issuer and any 3^rd party claims against the issuer
• Interoperability Standards
  • Primary pstablecoin Federal regulators are to consult with standards-setting orgs (like Nat’l Inst. of Standards and Tech) and potentially prescribe standards for permitted issuers to promote compatibility and interoperability among issuers and among the broader digital financial ecosystem, including inter-blockchain.

• Rulemaking
  • Within 1 year: primary federal regulator, Sec. of Treasury, and each state pstablecoin regulator must issue rules.
    • These entities must all coordinate

• SoT report on non-payment stablecoins
  • Determining their technology, pros and cons, utilization, nature of reserves, etc..
  • Considering endogenously collateralized stables as well
    • = “relies solely on the value of another digital asset created or maintained by the same originator to maintain the fixed price.”
• Application to Banks
  • Banks may still provide custodial services for pstablecoins, reserves, and private keys
  • Federal banking agencies, National Credit Union Administration, SEC cannot force a depository institution/bank/credit union to:
    • Include digital assets held in custody as a “liability” of the entity
    • To hold regulatory capital against digital assets except those needed to mitigate operational risks inherent in custodial services
      • The exception is determined by fed banking agency/nat’l credit union admin/state banking supervisor
  • State-chartered depository institutions
    • If these have a subsidiary that is a permitted pstablecoin issuer, the parent depository institution “may engage in the business of money transmission or provide custodial services through” the subsidiary so long as certain criteria is met:
      • Capital and liquidity requirements are already established on the institution by the state, that are readjusted annually
    • Host states (where the parent depository inst. has a branch, but where their subsidiary pstablecoin issuer is not chartered) may ensure compliance to the full extent of their jurisdiction regarding pstablecoin issuers that are subsidiary of the depository inst.
• Securities Laws
  • The following laws are amended to ensure pstablecoins are not considered securities and/or commodities:
    • Investment Advisory Act of 1940; Investment Company Act of 1940; Securities Act of 1933; Securities Exchange Act of 1934; Securities Investor Protection Act  1970; Commodity Exchange Act
• Foreign Pstablecoin exceptions; Reciprocity
  • Prohibition on unpermitted issuance does not apply if:
    • The foreign pstablecoin issuer is regulated under a foreign pstablecoin regulator that the SoT determines is comparable to the regulatory system created under the Act.
      • SoT’s determination subject to recommendations of each member of the Stablecoin Certification Review Committee.
      • Report of determination must be in Fed Reg
      • List of permitted countries with these regimes must be published
      • A SoT determination is rescindable, which then triggers a safe harbor for digital asset services before they cannot use the foreign pstablecoins.
    • Foreign pstablecoin issuer is registered with the Comptroller 
    • The foreign issuer holds reserves in the U.S. that can meet liquidity demands of US customers (unless permitted under a reciprocal agreement)
    • The foreign issuer is not domiciled in a sanctioned country/one that has a high risk of laundering
  • A foreign issuer can request a determination from the SoT, who has 210 days
  • Foreign pstable issuer may use/offer stables thru a digital asset service if they are registered w the comptroller
    • This route its own criteria for registration, rescission, and appeal. SoT may still rescind a foreign issuers registration in this route too.
  • Reciprocity: Within 2 years of the Act, SoT may determine other countries that have regulatory regimes that fulfill the requirements in this Act. Certain criteria is listed (similarity of requirements, adequate AML, etc…)
• Disclosure:
  • Only after $5k of stablecoin holdings must a federal official disclose holdings