The US Senate has voted in favor of advancing a key bill for regulating dollar-backed stablecoins in the country after Democrat lawmakers had blocked an earlier attempt to move the legislation forward.
The Guiding and Establishing National Innovation for US Stablecoin Act, or GENIUS, introduced by Senator Bill Hagerty in February, was passed in a 66-32 vote on May 19 after requests by Senate Democrats to reduce user privacy in crypto transactions were accepted.
Several Democrats, including Mark Warner, Adam Schiff, and Ruben Gallego, changed their votes to pass the motion to invoke cloture, setting up the bill for a debate on the Senate floor. Republican Senator Cynthia Lummis, one of the GENIUS Act’s main backers, said that it was fair for the legislation to have passed by the end of May.
What is the GENIUS Act?
GENIUS Act seeks to regulate the nearly $250 billion stablecoin market in the United States by providing clear guidelines for issuance and transparency, as well as reserve obligations.
It requires the fiat-backed cryptocurrencies to be fully backed, have regular security audits, and receive approval from federal or state regulators. The bill only allows licensed entities to issue stablecoins, while restricting the issuance and circulation of algorithmic stablecoins.
Under the GENIUS Act, stablecoin issuers will be mandated to maintain a 1-to-1 reserve of liquid assets, such as cash or cash equivalents, to back their tokens. This is to ensure that holders can redeem their coins at any time. The bill also states that in the event an issuer faces insolvency, holders of the stablecoin will be prioritized over creditors. Additionally, issuing companies will be required to abide by conventional AML regulations.
Another key component of the Act is that it will allow US banks to issue their own stablecoin, and nonbank entities as well, provided they register and meet certain regulatory benchmarks.
Concerns Raised over the Bill and How it Could Affect Users
Senate Democrats produced two documents providing an analysis of the GENIUS Act and the concerns they have surrounding the legislation.
The first of these documents, titled “Banking Committee Democratic Staff Analysis on Latest GENIUS Act Draft”, refers to stablecoins as tools used for illicit finance and states that the current iteration of the bill fails to impose “basic obligations” on crypto mixers. It also reads that the bill does nothing to clarify that consumer protection laws apply to stablecoin transactions or that the Consumer Financial Protection Bureau has oversight over the asset class.
While the bill bars the use of misleading names for stablecoins that could confuse users on whether they are backed by the US government, critics cited that it conveniently carved out the “USD” acronym used by the USD1 stablecoin, issued by World Liberty Financial, a DeFi company backed by President Trump.
Democrats even requested a study on how investors could be affected when issuers go through bankruptcy. They also raised concerns over a clause in the bill restating existing sanctions authority, which does nothing to address the Treasury Department’s claim that existing law allows terrorists to evade sanctions by switching from dollars to dollar-backed stablecoins.
Democrats on the Senate Banking Committee circulated a second document earlier this week, which is a letter signed by 46 advocacy groups opposing the GENIUS Act. The authors of the letter claim the bill does not promote measures to prevent illicit financing as it continues to permit crypto investors to use wallets that lack know-your-customer (KYC) requirements.
If these concerns are heard and the GENIUS Act is amended, then all wallets holding stablecoins will be required to comply with KYC, including self-custody wallets.
Does the GENIUS Act Put Crypto Users’ Privacy at Stake?
While the GENIUS Act only accounts for dollar-pegged stablecoins, it does not mean that Bitcoin and other cryptocurrencies won’t be affected by it. If the bill’s opponents get their way and the demands they made are included before its passing, then the use of crypto token mixers to obscure transactions will be banned, and any wallet with stablecoins will be required to complete KYC procedures. This will do away with anonymity forever, forcing crypto users to reveal their identities every step of the way.
However, the bill’s main backers, like Sen. Lummis and Sen. Ted Cruz, fully understand crypto investors’ need for maintaining privacy as they are Bitcoin holders. While some exemptions can be expected for the bill’s passage, supporters are more likely to steer the bill away from affecting other areas of the crypto market.
What Next for the GENIUS Act?
Following the GENIUS Act’s cloture vote, which prevents a filibuster and limits debates to 30 hours on the Senate floor, the bill now advances to a full Senate Vote. This is expected to take place in the coming days, as reported by crypto news outlet Decrypt, which cited a Senate source with knowledge of the matter.
Market experts suggest that the bill’s passage will provide some short-term tailwinds for the crypto market, as its advancement in the Senate represents the first step toward a comprehensive crypto regulation in the United States and signals a clear entry for the asset class into the larger economy.
Both Bitcoin (BTC) and Ethereum (ETH) made gains following Monday’s vote, and if approved by the Senate, the GENIUS Act will inject some form of bullishness into the market. However, it is not expected to have as profound an impact on crypto prices as other policy changes, such as the Securities and Exchange Commission’s (SEC) decision to approve the trading of Bitcoin-backed ETFs on Wall Street in early 2024, which led to BTC registering an all-time high three months later.