The passage of the GENIUS Act in 2025 marked a watershed moment in the U.S. regulation of stablecoins. Officially named the Guiding and Establishing National Innovation for U.S. Stablecoins Act, the legislation provides the country’s first comprehensive regulatory framework for licensing and overseeing payment stablecoin issuers. For a growing digital financial ecosystem that includes billions in daily trading volume, this was hailed as long overdue.
However, while the GENIUS Act establishes much-needed legal clarity, it falls short in addressing several key risks that still threaten the U.S. financial system. These include the persistence of implicit government guarantees, the potential for systemic spillover during crises, and inadequate transparency from stablecoin issuers. If these vulnerabilities remain unchecked, the next financial shock could expose taxpayers and traditional banks to the very same liabilities the Act was supposed to eliminate.
Understanding the GENIUS Act
The GENIUS Act defines payment stablecoins as digital assets that are designed for use as a means of payment, are expected to maintain a stable monetary value, are redeemable for currency, and are neither a national currency nor a security. Importantly, these assets are not classified as deposits under existing banking laws, which positions them outside the scope of federal deposit insurance protections.
The Act creates two licensing tracks: one through the Office of the Comptroller of the Currency (OCC) at the federal level and another through individual state regulatory agencies. Additionally, insured depository institutions can issue stablecoins through subsidiaries. The law requires a 1:1 reserve asset ratio, meaning every dollar-backed stablecoin must be backed by an equivalent dollar in reserve, invested in high-quality, short-term, liquid assets. Issuers must also meet public disclosure and audit standards and comply with regulations on safety, soundness, and anti-money laundering, which will be developed by relevant agencies.
In theory, this structure fosters accountability and market discipline. In practice, though, the Act leaves the door open to many of the same moral hazards that surfaced during the banking turmoil of 2023.
The Illusion of No Federal Backstop
One of the GENIUS Act’s central claims is that payment stablecoin issuers not affiliated with depository institutions will be resolved under U.S. bankruptcy law, excluding them from any federal deposit insurance protection. But this assertion lacks teeth.
Consider the case of Circle, the issuer of USDC, the second-largest U.S. dollar-backed stablecoin. In March 2023, Circle revealed that $3.3 billion of its stablecoin reserves were held as uninsured deposits at Silicon Valley Bank (SVB). When SVB collapsed due to massive unrealized interest rate losses, Circle was suddenly at risk of losing nearly 10% of its stablecoin backing.
Rather than allow this loss to trigger a failure of USDC which could have had cascading effects across crypto and traditional financial markets, the Treasury, FDIC, and Federal Reserve coordinated an emergency response. A blanket guarantee was issued to all depositors at SVB and Signature Bank, including Circle. This intervention spared Circle, but it did so by bending existing rules and deploying resources originally intended to protect traditional bank depositors.
The GENIUS Act does nothing to prevent such ad hoc rescues in the future. While it formally excludes stablecoin issuers from FDIC insurance, the reality of emergency bailouts suggests that these protections may be granted in crisis scenarios regardless of legal status. In effect, the Act preserves a system of implicit guarantees, one in which stablecoin firms operate without paying into the insurance system but still benefit from it during financial panics.
Lender of Last Resort: Still Undefined
The GENIUS Act also sidesteps a major structural question: Should there be a lender of last resort for payment stablecoins?
Historically, the Federal Reserve serves this role for traditional banks, providing liquidity in exchange for collateral to prevent panic-driven failures. During the SVB and Signature crises, the Fed stepped in with hundreds of billions of dollars in loans to FDIC bridge banks, which included liabilities to firms like Circle.
These loans came at a premium, 70 basis points above Treasury borrowing rates, and were necessary because the FDIC had no access to Treasury funds due to the debt ceiling. This backstop was essential to prevent a systemic breakdown, but it came at enormous cost.
By not directly addressing the need for a stablecoin-specific lender of last resort, the GENIUS Act allows this ambiguity to persist. The Federal Reserve and FDIC remain the de facto last-resort liquidity providers, even though stablecoin firms are not part of the insured banking system. This contradiction poses long-term risk to the credibility and fiscal health of U.S. financial safeguards.
The FDIC Paid the Price—So Did Banks
The emergency bailouts of 2023 were not costless. The FDIC’s insurance fund recorded a $16.2 billion loss, so large that it exceeded the fund’s available balance. Because the FDIC couldn’t access Treasury funds, it relied on the Federal Reserve’s discount window.
In a final irony, the burden of covering these losses fell not on the firms that triggered the crisis, but on the largest U.S. banks. Through special assessments, banks like JPMorgan and Bank of America were forced to pay for the fallout of risky behavior by Circle and its banking partners. These costs were assessed with little public debate or transparency, effectively socializing losses caused by private crypto companies.
Nothing in the GENIUS Act prevents this from happening again. Without structural separation between stablecoin reserves and traditional banking channels (or without legally enforceable rules on deposit insurance exclusions) similar spillovers will recur during the next financial crisis.
A Transparency Problem Still Unsolved
While the GENIUS Act does include disclosure requirements, they fall short of what’s needed to ensure true transparency.
Stablecoin issuers must report the total value of their reserves and undergo independent audits. But the law does not require detailed breakdowns of where those reserves are held. In Circle’s case, it wasn’t until SVB failed that the public learned $3.3 billion was held in a single, uninsured bank.
To properly assess systemic risk, regulators and the public need more granular information. At a minimum, monthly disclosures should list each bank holding reserve assets and the amount held. Concentration risks such as overexposure to one institution can’t be managed without this data.
The lack of mandated transparency undermines the very risk management principles that the GENIUS Act is supposed to support.
No Safeguards Against Future Bailouts
Ultimately, the GENIUS Act does not structurally protect the financial system from future stablecoin-driven bailouts. By refusing to legislate explicit prohibitions or legal subordination of stablecoin claims in FDIC resolutions, the law maintains the status quo.
A more robust approach would require stablecoin deposits to be junior to traditional bank deposits in any government resolution process. Such legal clarity would deter risky behavior by ensuring that stablecoin holders cannot expect the same level of protection as FDIC-insured accounts.
Instead, the GENIUS Act preserves ambiguity offering plausible deniability about future bailouts without actually foreclosing the possibility.
Conclusion
The GENIUS Act brings long-needed structure to the fast-growing stablecoin market. It sets important standards for reserve backing, licensing, and compliance. But it fails to address three core vulnerabilities that threaten both the crypto ecosystem and the broader financial system: implicit guarantees, systemic spillover, and insufficient transparency.
By allowing these risks to persist, the Act leaves the door open for future taxpayer-backed rescues and exposes traditional banks to costs they did not create. If regulators and lawmakers want to avoid a repeat of the 2023 bailout playbook, they will need to go further, closing loopholes, enforcing transparency, and erecting real firewalls between digital assets and the safety net meant for insured depositors.
Until then, the risks may be hidden, but they are far from gone.
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