Amended Genius Act tackles possible US Treasury conflict-of-interest issues
The Genius Act, a groundbreaking piece of legislation aimed at regulating stablecoins, is set to receive a Senate vote in the next two weeks. This act imposes new restrictions on the Treasury's powers regarding stablecoin regulation to prevent conflicts of interest related to Treasury debt issuance.
The Act limits the Secretary of the Treasury's authority in several ways. For instance, it restricts payment stablecoin issuance to authorized entities such as federally or state-regulated subsidiaries or entities meeting strict criteria, thereby limiting the Treasury's direct involvement in authorizing issuers.
Moreover, the Act prohibits payment stablecoin issuers from paying holders any interest or yield solely for holding or using stablecoins, helping avoid incentives that could distort Treasury debt markets.
Transparency requirements are also a significant part of the Genius Act. Large issuers (over $50 billion) are required to submit annual audited financial statements, which include disclosures about related-party transactions, ensuring oversight that offsets conflicts arising from Treasury’s dual role.
Public or foreign companies seeking to issue stablecoins must receive unanimous approval from the Stablecoin Certification Review Committee, which ensures their stablecoins won’t pose material risks to U.S. banking or financial stability and that they comply with tying prohibitions.
The Act also addresses potential conflicts of interest by requiring reciprocal agreements with foreign stablecoin regulators to include adequate anti-money laundering and compliance standards and sufficient supervisory and enforcement powers.
In addition, the Genius Act amendments tighten the requirements for these reciprocal agreements, acknowledging the inherent tension in giving the Treasury extensive power over stablecoin issuers who are major buyers of Treasury debt.
The Act further requires justification for exigent exceptions granted to stablecoin issuers, even in unusual and exigent circumstances. This is to ensure that the Treasury's actions in these exceptional situations are transparent and accountable.
As stablecoins become more integral to the financial system, the tension between Treasury's dual roles may require more fundamental separation of authorities. The Stablecoin Certification Review Committee, consisting of the chairs of the Treasury, Federal Reserve, and FDIC, now has the power to reject decisions regarding foreign stablecoins, further insulating Treasury regulatory powers from conflicts linked to financial stability risks.
The Genius Act balances Treasury regulatory authority with safeguards, such as limiting issuer eligibility, prohibiting yield payments from stablecoins, requiring audits, and independent committee approvals, to prevent conflicts between Treasury’s stablecoin oversight and its role in federal debt market stability.
Recent research by the Bank for International Settlements (BIS) has quantified the potential significant impact that stablecoin demand can have on short-term Treasury rates. With the stablecoin market cap approaching $250 billion and potentially reaching $2 trillion soon, the implications of stablecoins for Treasury debt servicing costs and monetary policy are significant.
Treasury Secretary Scott Bessent stated during Congressional testimony that there may be up to $2 trillion of demand for U.S. government securities from digital assets over the next few years, emphasizing the importance of the Genius Act in managing these new financial realities.
In conclusion, the Genius Act is a critical step towards ensuring the stability and security of the U.S. financial system in the era of digital assets, while also protecting the Treasury's ability to issue and manage debt effectively.
- The Genius Act, currently facing a Senate vote, imposes new restrictions on the Treasury's powers related to stablecoin regulation, aiming to prevent conflicts of interest linked to Treasury debt issuance.
- The Act prohibits payment stablecoin issuers from paying holders any interest or yield, helping avoid incentives that could distort Treasury debt markets.
- Transparency requirements are key elements in the Genius Act; large issuers are required to submit annual audited financial statements, disclosing related-party transactions, ensuring oversight that offsets potential conflicts arising from Treasury's dual role.
- The Act also addresses potential conflicts of interest by requiring reciprocal agreements with foreign stablecoin regulators to include adequate anti-money laundering and compliance standards.
- Recent research by the Bank for International Settlements (BIS) highlights the significant potential impact that stablecoin demand can have on short-term Treasury rates, as the stablecoin market cap approaches $250 billion and may reach $2 trillion soon.
