Edited by Hugh Fraser

The GENIUS Act, passed last month in the US, is looking very clever one month on. We believe the Act will prove to be the catalyst for huge productivity and efficiency gains as stablecoins, tokenisation and real time settlement and certainty unleash the benefits of blockchain and digital technologies at scale.  At the same time GENIUS has the potential to significantly ease the US’s debt burden, while solidifying the US Dollar as the global reserve currency.  This article explores what's happening and the consequences, focusing on the coming disruption in the global forex SPOT market, and the important long term macro changes greater usage of stablecoins will precipitate. 

What is the GENIUS Act

The Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS) represents a watershed moment in cryptocurrency regulation. The Act creates three categories of permitted stablecoin issuers in the United States: subsidiaries of banks and credit unions, federal qualified nonbank payment stablecoin issuers approved by the Office of the Comptroller of the Currency (OCC), and state qualified payment stablecoin issuers under approved state regulatory regimes.

The GENIUS Act is a key milestone in advancing stablecoin adoption, offering much-needed regulatory clarity and consumer safeguards. By setting clear standards for reserves, audits, and oversight, the Act will mitigate risks tied to stablecoins while supporting their continued innovation.

What is a Stablecoin

Stablecoins represent a revolutionary approach to digital money, combining the stability of traditional currencies with the efficiency and security of blockchain technology. These digital tokens are designed to maintain a stable value by linking their worth to established assets, typically fiat currencies like the US dollar and the Australian dollar. Stablecoins offer predictable value, making them suitable for everyday transactions and financial operations.

The mechanism behind stablecoins is elegantly simple yet powerful. Each token is backed by equivalent value in reserves – typically cash deposits in US banks, Treasury Bills, and other liquid dollar assets, that can be redeemed on demand for fiat currency. This 1:1 backing ensures stability while enabling the speed and programmability that blockchain technology provides.

With the passing of the GENIUS Act the stablecoin market and stablecoin issuance is set to explode, with forecasts of circa US $3trillion in circulation by 2030, a twelve-fold increase from the current level. Stablecoins are rapidly entering the mainstream and in the long term may well be the dominant transmission of global mercantilism. 

M2 Supply vs Stablecoin Supply - 2020-2030

Goodbye spot FX transactions

The global FX spot market is immense, with daily turnover of over $2trillion, or over $7trillion including forwards, swaps and options. Despite this vast market fiat spot transacting remains cumbersome and expensive. It still takes days to send money abroad, with fees imposed at every stop, all while having to take on multiple bank balance sheet risks throughout the unpleasant journey. 

Compliant stablecoins are now set to dominate global FX flows given their overwhelming advantages – instant certainty, irrefutable proof, eliminating processing layers, disintermediating banks and FX traders as middlemen. And of course, the elimination of fees and spreads.

With programmable regulated stablecoins, instruments such as forwards, swaps and options, will be ‘programmed’ into the stablecoin itself, defined by parties entering into the stablecoin transaction.

Productivity gains and cost savings arising for the regulated stablecoins and the death of fiat spot are hard to quantify. What is clear, however, is that those savings and gains will be measured in the hundreds of billions annually.

Traditional Payments vs Stablecoins

Stablecoins will also help the US Dollar remain supreme

As the use of stablecoins proliferates, it’s inevitable that USD stablecoins will soon be the largest holders of US debt... they already are one of the largest holders, and the fastest growing.

This demand is driven the GENIUS Act's framework which imposes strict reserve requirements. Stablecoin issuers must maintain 1:1 reserve backing with USD high-quality liquid assets such as cash and short-term Treasury securities, which cannot be rehypothecated. This ensures that every stablecoin issued is fully backed by equivalent value in stable assets, with no reserves pledged for other purposes, preserving liquidity and safety.

Demand for US dollars won’t just come from US based stablecoins. For instance, European Union USD stablecoin regulations are likely to require European regulated issuers to hold reserve assets within European banks. USD stablecoins holders faced with the prospect of holding Italian-Spanish-Greece-Portugal balance sheet risk vs US balance sheet risk against their USD stablecoin holding will most certainly convert their EU regulated USD stablecoins to US regulated USD stablecoins, creating yet more demand for USD debt. 

There will be two huge effects of this demand growth for US debt.  Firstly, debt financing costs for US Federal and State Governments will fall as demand rises. Secondly, US regulated USD stablecoins will undoubtedly entrench the USD as the global reserve currency, entrenching the United States' privilege and power.

Comparison of Self-Reported Stablecoin Issuers’ Reserves - (As of Dec 2024)

Beyond the US

Already we have seen how digital assets - notably Bitcoin - are having increasing utility and take-up as an independent and uncorrelated store of value and wealth in many countries, particularly when there is an erratic and fluctuating national currency, or serious impediments to transfer and utility. Now stablecoins that combine the best attributes of traditional systems - liquidity, backed by reserves and de facto sovereign authorities - with the best of digital and defi - portable, verifiable, instant settlement, programmable - will further entrench digital assets growth and take-up.

YoY Growth Rate in Stablecoin Transactions Within High Inflation Countries

Final thoughts

The convergence of regulatory clarity, technological advancement, and market dynamics positions stablecoins for significant growth over the next decade. The GENIUS Act provides the foundation for massive expansion of USD stablecoins. This will have far reaching effects across virtually all financial services and capital markets, bringing new services and market models.

For investors, crypto enthusiasts, and the crypto-curious, these developments represent a historic transition in the global financial system. Stablecoins are evolving from experimental technologies to fundamental infrastructure that will underpin the next generation of financial services. The regulatory frameworks being established today will shape this transformation for decades to come.

Disclaimer

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Still GENIUS in August