Congress redefined the playing field for digital assets. Although the recent Senate win was on party lines, the GENIUS Act promises to bring stablecoins – blockchain-based tokens pegged to fiat currency – more squarely into the regulated financial system. This legislative framework is a constructive development for the crypto sector and the banking industry alike, introducing long-awaited regulatory clarity around stablecoins and establishing clear licensing pathways for issuers and setting ground rules that could integrate stablecoins into mainstream finance. In doing so, it also forces traditional banks to face a new reality: they will have to compete more directly for deposits in a world where digital dollars provide compelling alternatives.
For years, stablecoin issuers operated in a gray area – treated as money transmitters in some states, eyed warily by federal regulators, and with uncertainty about whether tokens like USDC or USDT might be deemed securities. The GENIUS Act seeks to end this ambiguity, creating the first comprehensive U.S. regulatory framework for stablecoins by defining them as “payment stablecoins” fully backed by safe assets and giving federal agencies like the Office of the Comptroller of the Currency (OCC) clear authority to oversee them. What’s also great is that the GENIUS Act provides an alternative to Europe’s heavy-handed approach to regulating digital assets and pushing central bank digital currencies, which displaces demand for stablecoins.
Under the Act, only approved issuers could offer stablecoins, whether as banks or as special non-bank entities that obtain a federal license. While there are quibbles about the technical details on how the licenses are given out, it carves out a legal path for stablecoin providers to operate under bank-like supervision without being banks. This oversight includes requirements like 1:1 reserve backing (in cash or Treasury bills), segregated reserves, monthly audits, and strict capital and liquidity rules. Such measures aim to bolster trust in stablecoins as a safe medium of exchange, much like deposits, but in digital bearer form.
Some critics may worry that the bifurcated licensing regime could open the door to regulatory arbitrage, though the Act attempts to mitigate this by applying strict reserve, audit, and disclosure requirements across both pathways. Crucially, the Act also specifies what counts as high-quality reserves. Stablecoin issuers would be required to hold only short-term U.S. Treasury bills or equivalent safe assets against their tokens. This not only safeguards the peg (each token truly backed by $1 in liquid assets), but also pulls stablecoins into the orbit of traditional finance. Regulated stablecoins could resemble money market funds or narrow banks with their circulating tokens functioning as a new form of dollar-denominated money, which could allow issuers to become major purchasers of Treasury bills. Circle’s USDC, for example, already keeps the bulk of its $60+ billion reserve in short-term U.S. debt.
By legitimizing stablecoins, Congress is also pushing banks to become more competitive in how they operate and provide value to borrowers. Banks have long enjoyed an advantage: sticky deposits. Businesses and consumers park trillions in checking and savings accounts that pay little or no interest, providing banks with cheap funding to make loans. But stablecoins change the equation. A regulated stablecoin gives holders a digital dollar that is instantly transferable worldwide and fully backed by interest-earning assets – effectively combining the liquidity of a checking account with the yield of a T-bill investment. While some worry that deposit flight could constrain bank lending, especially for smaller institutions, the more likely scenario is a recalibration: banks may increasingly differentiate themselves through credit expertise and integrated digital services, rather than passive liquidity capture. The rise of dollar-denominated stablecoins could also advance broader U.S. objectives by accelerating de facto dollarization in some emerging markets, complicating local monetary policy and financial stability
Regulators on the Treasury’s Borrowing Advisory Committee (TBAC) have taken notice. In their Q2 2025 report a few weeks ago, the TBAC reported that stablecoin issuers already hold more than $120 billion in U.S. Treasury bills, and that continued growth of stablecoins could generate up to $900 billion in additional T-bill demand in coming years. That represents a major new source of financing for the government, as well as a corresponding outflow of funds that might previously have sat in bank deposits. While they pointed out that surging stablecoin adoption will likely come “at the expense of bank deposits” – and banks are already seeing hints of this shift as tech-savvy customers explore digital dollars for uses, ranging from cross-border remittances to parking spare cash – the long-run effects do not need to come as a substitute.
Stablecoins need not cannibalize traditional banking, as my new paper points out with digital twins. Several large banks are already exploring stablecoins that would settle on public or permissioned blockchains while remaining inside the bank’s regulatory perimeter. A tokenized deposit lets customers tap the speed and programmability of digital dollars for payroll, trade finance, or cross-border settlement, yet keeps the relationship – and the associated lending, advisory, and treasury services – anchored at the bank. Stablecoins have the potential to be complementary: stablecoins broaden the menu of money-like instruments while banks compete on service, trust, and credit expertise instead of relying on inert, zero-yield deposits alone.
Historically, such phenomena with changes in the mechanism for financing are not new, but this is the first time technology enables private dollars to move globally and near-instantly with such ease. Rather than resist this shift, the GENIUS Act leans into it, aiming to harness the innovation while corralling the risks. If implemented, it could foster a more efficient and competitive financial system. Stablecoins, with appropriate oversight, can increase competition in deposit markets and improve the efficiency of money-like instruments – making transfers faster and cheaper, and potentially widening access to dollar-based savings in communities poorly served by banks. Banks must revisit how they attract and retain customers’ funds in an era when loyalty can be withdrawn with a few clicks to a digital wallet, and the GENIUS Act is a step in the direction towards establishing the rules of the game for digital assets.
