Original author: Leviathan News
Original translation: TechFlow
Hello everyone, SQUIDs! Today we will analyze two stablecoin bills in the US Congress.
The final stablecoin bill is expected to be passed later in 2025, so it is critical to understand what the bill contains and how it will affect our industry.
introduction
We are in a bull market, a bull market for stablecoins.
Since the market bottomed out following the FTX crash, stablecoin supply has doubled in 18 months to $215 billion. That doesn’t even include emerging crypto-only players like Ondo, Usual, Frax, and Maker.
With interest rates currently at 4%-5%, the stablecoin industry is lucrative. Tether made $14 billion in profit last year with less than 50 employees! Circle plans to file for an IPO in 2025. Everything revolves around stablecoins.
With Biden out of office, we are almost certain to see stablecoin legislation in 2025. Banks have watched Tether and Circle take over the market for five years. Once the new law passes and legalizes stablecoins, every bank in the United States will issue its own digital dollar.
There are currently two major legislative proposals moving forward: the Senate’s Guiding and Establishing National Innovation for US Stablecoins Act of 2025 (GENIUS Act) and the House’s Stablecoin Transparency and Accountability for a Better Ledger Economy Act of 2025 (STABLE Act).
These bills have been bouncing around in the legislative process for a long time… but now there’s finally a consensus that one of them will pass this year.
The common goal of the GENIUS Act and the STABLE Act is to create a federal licensing system for issuers of payment stablecoins, establish strict reserve requirements, and clarify regulatory responsibilities.
Payment Stablecoins is just a nice term for digital dollars issued by banks or non-bank institutions under their balance sheet authorization. It is defined as a digital asset used for payment or settlement, whose value is pegged to a fixed currency value (usually 1:1 with the US dollar) and backed by short-term government bonds or cash.
Critics of stablecoins argue that they will undermine the government’s ability to control monetary policy. To understand their concerns, read the classic article “Taming Wildcat Stablecoins” by Gorton and Zhang.
The first rule of the dollar in the modern era is: never decouple.
A dollar is a dollar no matter where it is.
Whether it’s stored at JP Morgan, in Venmo or PayPal, or even as virtual credits in Roblox, no matter where the dollar is spent, it must always meet these two rules:
Every dollar must be fungible: There can be no mental categorization of dollars, labeling them “special,” “reserved,” or tied to a specific use. A dollar at JPMorgan cannot be considered different from a dollar on Tesla’s balance sheet.
Dollars are fungible: all dollars are the “same” wherever they are held — in cash, in bank deposits, in reserves.
The entire fiat financial system is built around this principle.
Thats what the Fed is all about - making sure the dollar stays pegged and strong. Never unpegged.
The slide above is from Zoltan Pozsar’s How the Financial System Works, the definitive guide to the dollar, and it gives you a lot of context for understanding what these stablecoin bills are trying to accomplish.
Currently, all stablecoins are classified as Private Shadow Money in the lower right corner. If Tether or Circle were shut down or went bankrupt, it would be disastrous for the crypto industry, but the impact on the overall financial system would be minimal. Life would go on as usual.
Economists worry that the risks will only become apparent once stablecoins are legalized, allowing banks to issue them and turning them into public shadow money.
Because, in a fiat currency system, the only question that matters is: who gets bailed out when a crisis hits. This is the core of the slide above.
Remember 2008? At the time, U.S. mortgage-backed securities (MBS) accounted for a very small proportion of the global economy, but banks were always operating with nearly 100 times leverage, and collateral was cross-flowing between the balance sheets of various banks. Therefore, when one bank (Lehman Brothers) collapsed, it triggered a series of similar explosive failures due to the chain contagion of leverage and balance sheets.
The US Federal Reserve (Fed) and other monetary institutions such as the European Central Bank (ECB) had to step in (globally) to secure all banks’ balance sheets from these “toxic debts”. Billions of dollars in bailouts were spent, but the banks were saved. The Fed will always bail out banks because without them the global financial system would not function and the dollar would risk being unpegged in institutions with bad balance sheets.
In fact, you don’t even need to go back to 2008 to see similar examples.
In March 2023, Silicon Valley Bank collapsed rapidly over a weekend in a bank run fueled by digital withdrawals and panic-mongering on social media. SVB failed not because of risky mortgages, derivatives, or cryptocurrencies, but because of its holdings of supposedly “safe” long-term U.S. Treasury bonds, which lost value when interest rates rose. Yet, despite its relatively small size in the overall banking system, SVB’s failure still threatened systemic contagion, forcing the Federal Reserve, the Federal Deposit Insurance Corporation, and the Treasury Department to quickly step in to guarantee the safety of all deposits—even those above the standard insurance limit of $250,000. This swift government intervention highlighted a principle: when dollars anywhere become untrustworthy, the entire financial system can collapse overnight.
The collapse of SVB had an immediate knock-on effect on the crypto markets. Circle, the issuer of USDC, held a significant portion of its reserves at SVB, with a total supply of about $30 billion at the time. Over the weekend, USDC de-pegged by about 8 cents, briefly trading at about $0.92, sparking panic in the crypto markets. Now, imagine what would happen if this de-pegging occurred globally? This is exactly the risk these new stablecoin bills present. By allowing banks to issue their own stablecoins, policymakers could be embedding potentially destabilizing tools deeper into the global financial infrastructure, significantly increasing the risk when (not “if” but “when”) the next financial shock occurs.
The core point of Zoltan Pozsars slide is that when a financial disaster occurs, it is ultimately the government that must step in to save the financial system.
Today, we have multiple classes of U.S. dollars, each with varying levels of security.
The US dollar issued directly by the government (ie M0 dollars) enjoys the full credit guarantee of the US government and is basically risk-free. However, when the funds enter the banking system and are classified as M1, M2 and M3, the governments guarantee gradually weakens.
This is why bank bailouts are so controversial.
Bank credit is the core of the U.S. financial system, but banks often have incentives to pursue the greatest risks within the legal scope, often leading to dangerous over-leverage. When such risky behavior crosses the line, financial crises will break out, and the Federal Reserve will have to step in and provide assistance to prevent the entire system from collapsing.
The worry is that the vast majority of money today is in the form of credit issued by banks, which are deeply interconnected and leveraged. If several banks fail at the same time, it could set off a domino effect, spreading losses to every industry and asset class.
In 2008, we saw this happen in action.
Few would have imagined that a seemingly isolated area of the U.S. housing market could destabilize the global economy, but due to extreme leverage and fragile balance sheets, banks were unable to withstand the impact once the collateral they once thought to be safe collapsed.
This context helps explain why stablecoin legislation has been so divisive and progress has been slow.
As a result, lawmakers have taken a cautious approach, carefully defining what counts as a stablecoin and who is eligible to issue it.
This cautious approach has spawned two competing legislative proposals: the GENIUS Act, which takes a more flexible approach to stablecoin issuance, and the STABLE Act, which places strict restrictions on issuance eligibility, interest payments, and the qualifications of issuers.
However, both bills represent a critical step forward and could unlock trillions of dollars in potential for on-chain transactions.
Next, let’s analyze these two bills in detail to understand their similarities, differences, and ultimately their potential impact.
The GENIUS Act: The Senate’s Stablecoin Framework
The GENIUS Act of 2025 (Guiding and Establishing National Innovation for US Stablecoins Act) was introduced by Senator Bill Hagerty (R-Tenn.) in February 2025 and has bipartisan support, including participation from Senators Tim Scott, Kirsten Gillibrand, and Cynthia Lummis, among others.
On March 13, 2025, the bill passed the Senate Banking Committee with 18 votes in favor and 6 votes against, becoming the first cryptocurrency-related bill to pass the committee.
Under the GENIUS Act, stablecoins are clearly defined as digital assets pegged to a fixed monetary value, typically pegged to the U.S. dollar at a 1:1 ratio, and primarily used for payment or settlement purposes.
While there are other types of “stablecoins,” such as Paxos’ PAXG (which is pegged to gold), tokens tied to commodities like gold or oil generally fall outside the scope of the current GENIUS Act, which currently only applies to fiat-pegged stablecoins.
Commodity-backed tokens are typically regulated by existing regulations of the Commodity Futures Trading Commission (CFTC) or the Securities and Exchange Commission (SEC), depending on their structure and purpose, rather than by stablecoin-specific legislation.
If in the future Bitcoin or gold becomes the dominant payment currency and we all migrate to live in Bitcoin-backed bastions, then the bill might apply, but for now they remain outside the direct regulatory scope of the GENIUS Act.
This is a Republican-led bill that came about because the Biden administration and the Democrats refused to draft any cryptocurrency-related legislation during the previous administration.
The bill introduces a federal licensing system that requires only authorized entities to issue payment stablecoins and establishes three categories of licensed issuers:
Bank Subsidiaries: Stablecoins are issued by subsidiaries of insured depository institutions, such as bank holding companies.
Non-insured depository institutions: These include trust companies or other state-chartered financial institutions that accept deposits but are not insured by the Federal Deposit Insurance Corporation (FDIC) (the current status of many stablecoin issuers).
Nonbank Entities: A new federal charter category established for nonbank stablecoin issuers (sometimes referred to in the bill as “payment stablecoin issuers”), which would be chartered and regulated by the Office of the Comptroller of the Currency (OCC).
As you might guess, all issuers are required to fully back their stablecoins 1:1 with high-quality liquid assets, including cash, bank deposits, or short-term U.S. Treasuries. In addition, these issuers are required to make regular public disclosures and audits by registered accounting firms to ensure transparency.
A highlight of the GENIUS Act is its dual regulatory structure, which allows smaller issuers (those that have not issued more than $10 billion in stablecoins) to operate under state regulation, provided that their state’s regulatory standards meet or exceed federal guidelines.
Wyoming is the first state to explore issuing its own stablecoin governed by local law.
Larger issuers are required to operate under direct federal regulation, primarily by the Office of the Comptroller of the Currency (OCC) or the appropriate federal banking regulator.
Notably, the GENIUS Act explicitly states that compliant stablecoins are neither securities nor commodities, thereby clarifying regulatory jurisdiction and alleviating concerns about possible regulation by the SEC or CFTC.
In the past, critics have called for stablecoins to be regulated as securities, a classification that would allow them to be distributed more widely and easily.
STABLE Act: House Rules
Introduced in March 2025 by Reps. Bryan Steil (R-Wis.) and French Hill (R-Arkansas), the Stablecoin Transparency and Accountability for a Better Ledger Economy Act (STABLE Act) is very similar to the GENIUS Act, but it introduces unique measures to mitigate financial risks.
The most notable point is that the bill explicitly prohibits stablecoin issuers from providing interest or income to holders, ensuring that stablecoins are strictly used as cash-equivalent payment tools rather than investment products.
Additionally, the STABLE Act imposes a two-year moratorium on the issuance of new algorithmic stablecoins, which rely solely on digital assets or algorithms to maintain their pegged value, pending further regulatory analysis and protections.
Two bills, sharing a common legal basis
Despite some differences, the GENIUS Act and the STABLE Act reflect broad bipartisan consensus on the fundamental principles of stablecoin regulation. The two bills agree on the following:
Stablecoin issuers are strictly required to obtain a license to ensure regulatory oversight.
Stablecoins are required to maintain full 1:1 support and be backed by highly liquid and secure reserve assets to guard against bankruptcy risks.
Implement strong transparency requirements, including regular public disclosure and independent audits.
Establish clear consumer protections, such as asset segregation and priority claims in the event of issuer bankruptcy.
Providing regulatory clarity by explicitly classifying stablecoins as neither securities nor commodities, thereby simplifying the jurisdictional and regulatory process.
Despite sharing basic principles, the GENIUS Act and the STABLE Act differ on three key points:
Interest Payments:
The GENIUS Act allows stablecoins to pay interest or income to holders, opening the door to innovation and a wider range of application scenarios in the financial sector. In contrast, the STABLE Act strictly prohibits interest payments, clearly limits stablecoins to pure payment tools, and explicitly excludes their function as investment or income assets.
Algorithmic stablecoins:
The GENIUS Act takes a cautious but lenient approach, requiring regulators to closely study and monitor such stablecoins rather than immediately ban them. In contrast, the STABLE Act adopts a clear and direct two-year moratorium on the issuance of new algorithmic stablecoins, reflecting a more cautious stance after past market crashes.
State and federal regulatory thresholds:
The GENIUS Act explicitly states that when the total amount of stablecoins issued by an issuer reaches $10 billion, it must transition from state regulation to federal regulation, thus clearly defining when a stablecoin issuer is systemically important. The STABLE Act implicitly supports similar thresholds, but does not specify specific values, giving regulators more discretion to make continuous adjustments based on market developments.
Why is interest prohibited? Explaining the ban on stablecoin earnings
One of the most notable provisions in the House STABLE Act (and some previous proposals) is that it prohibits stablecoin issuers from paying interest or any form of income to token holders.
In practice, this means that compliant payment stablecoins must act like digital cash or a stored value instrument - you hold 1 stablecoin, which is always redeemable for 1 US dollar, but it does not bring you any additional returns over time.
This contrasts with other financial products, such as bank deposits that may earn interest or money market funds that accumulate income.
So why impose such restrictions?
There are many legal and regulatory reasons behind this prohibited interest rule, which is mainly based on US securities laws, banking laws and related regulatory guidelines.
Avoiding classification as a security (Howey test)
One of the main reasons for prohibiting interest payments is to avoid stablecoins being considered investment securities under the Howey Test.
The Howey test stems from a 1946 U.S. Supreme Court case. Under the test, an asset is considered an “investment contract” (and therefore a security) if it meets the following conditions: there is money invested in a common enterprise, and the investor expects to make a profit through the efforts of others. A stablecoin that strictly functions as a payment token is not designed to provide “profits”, it is just a $1 token with a stable value.
However, once the issuer starts offering a return (e.g. a stablecoin pays a 4% annualized rate of return through reserves), users will expect to profit from the issuer’s efforts (which may be generated by investing reserves). This could trigger the Howey test, raising the risk that the U.S. Securities and Exchange Commission (SEC) could claim that the stablecoin is a securities offering.
In fact, former SEC Chairman Gary Gensler has suggested that some stablecoins may be securities, especially if they resemble shares in money market funds or have profit characteristics. To avoid this risk, the drafters of the STABLE Act explicitly prohibit the payment of any form of interest or dividends to token holders, ensuring that there is no expectation of profit. In this way, stablecoins can maintain their attributes as a practical payment tool rather than an investment contract. In this way, Congress can confidently classify regulated stablecoins as non-securities, which is also the common position of both bills.
However, the problem with this ban is that there are already stablecoins with interest on the chain, such as Sky’s sUSDS or Frax’s sfrxUSD. Banning interest will only add unnecessary obstacles for stablecoin companies that want to explore different business models and systems.
Maintaining the boundary between banking and non-banking activities (Banking Law)
U.S. banking law has traditionally relegated the activity of taking deposits to the exclusive domain of banks (and thrifts/credit unions). (Deposits are essentially securities.) The Bank Holding Company Act of 1956 (BHCA) and related regulations prohibit commercial companies from taking deposits from the public—if you take deposits, you generally need to be a regulated bank, or you may be deemed a bank, which triggers a host of regulatory requirements.
When a client gives you money and you promise to return it with interest, it is effectively a deposit or investment note.
Regulators have indicated that stablecoins that function too similarly to bank deposits could run afoul of these legal boundaries.
By prohibiting the payment of interest, the drafters of the STABLE Act aim to ensure that stablecoins do not look like instruments disguised as uninsured bank accounts. Instead, stablecoins are more like stored-value cards or prepaid balances, which non-bank institutions are allowed to issue under specific regulations.
As one legal scholar put it, a company shouldn’t be able to “circumvent compliance requirements under the Federal Deposit Insurance Act and the Bank Holding Company Act” simply because its deposit-taking activities are packaged as stablecoins.
In fact, if stablecoin issuers were allowed to pay interest to holders, they could compete with banks for deposit-like funds (but without the regulatory safeguards of banks, such as FDIC insurance or Federal Reserve supervision), which would obviously be unacceptable to bank regulators.
It is also important to note that the U.S. dollar and financial system are entirely dependent on banks being able to issue loans, mortgages, and other forms of debt (for housing, business, and other goods and trade) that are often highly leveraged and backed by retail bank deposits as reserve requirements.
JP Konings analysis of the PayPal dollar is instructive here. Currently, PayPal actually offers two forms of the dollar.
One is the traditional PayPal balance we are familiar with - these dollars are stored in a traditional centralized database. The other is the newer, crypto-based dollar, PayPal USD, which exists on the blockchain.
You might think the traditional version would be safer, but surprisingly, PayPal’s CryptoDollar is actually safer and offers stronger consumer protections.
Here’s why: PayPal’s traditional dollars aren’t necessarily backed by the safest assets.
If you look closely at its disclosures, youll see that PayPal only invests about 30% of customer balances in top-tier assets, such as cash or U.S. Treasuries. The remaining nearly 70% is invested in riskier, longer-term assets, such as corporate debt and commercial paper.
Even more worrying is that these traditional balances don’t actually belong to you in a strict legal sense.
If PayPal goes bankrupt, you will become an unsecured creditor and will need to compete with others who owe money to PayPal, and it is not certain that you will get your balance back in full.
In contrast, PayPal USD (the crypto version) must be 100% backed by ultra-safe, short-term assets such as cash equivalents and U.S. Treasuries, as required by the New York State Department of Financial Services.
Not only are the backing assets safer, but these crypto balances explicitly belong to you: the reserves backing these stablecoins must be legally established for the benefit of holders. This means that if PayPal goes bankrupt, you will get your funds back before other creditors. This distinction is particularly important, especially when considering broader financial stability. Stablecoins like PayPal USD are not subject to balance sheet risk, leverage, or collateral issues of the broader banking system.
In a financial crisis — exactly when you need safety the most — investors may flock to stablecoins precisely because they are not entangled with banks’ risky lending practices or the instability of fractional reserves. Ironically, stablecoins may end up being more of a safe haven than the risky speculative vehicle many believe them to be.
This is a big problem for the banking system. In 2025, money will move as fast as the internet. The collapse of Silicon Valley Bank (SVB) was caused by scared investors quickly making digital withdrawals, which exacerbated its problems and ultimately led to its complete collapse.
Stablecoins are essentially better money, and banks are extremely afraid of them.
The compromise in these bills is to allow non-bank companies to issue dollar tokens, but only if they do not cross over into paying interest — thus avoiding direct encroachment on banks’ territory of offering interest-bearing accounts.
The line is clear: banks take deposits and lend them out (and can pay interest), while under the bill, stablecoin issuers must simply hold reserves and facilitate payments (no loans, no interest payments).
This is actually a modern interpretation of the concept of Narrow Banking, in which the stablecoin issuer almost plays the role of a 100% reserve institution and should not perform maturity transformation or provide returns.
Historical Analogies (Glass-Steagall and Regulation Q)
Interestingly, the idea that money used for payments should not bear interest has a long regulatory history in the United States.
The Glass-Steagall Act of 1933 is best known for separating commercial and investment banks, but it also introduced Regulation Q, which for decades prohibited banks from paying interest on demand accounts (i.e., checking accounts). The rationale at the time was to prevent unhealthy competition among banks for deposits and to ensure the stability of banks (excessive interest rates in the 1920s led to risk-taking and bank failures).
Although Regulation Q’s prohibitions were eventually phased out (and fully repealed in 2011), its core principle remains: your liquid trading balance should not also serve as an interest-earning investment vehicle.
Stablecoins are designed to be highly liquid transaction balances — the cryptocurrency equivalent of a checking account balance or cash in your wallet. By prohibiting interest payments on stablecoins, lawmakers are echoing an old philosophy: Keep payments safe and simple and separate them from yield-generating investment products.
This also avoids the possibility of uninsured shadow banking. (See Pozsars point, remember that private shadow banks cannot be bailed out.)
If stablecoin issuers offer interest, they are effectively operating like a bank (taking in funds and investing them in government bonds or lending them out to generate interest).
But unlike banks, their lending or investment activities are not regulated beyond reserve rules, and users may view them as as safe as bank deposits without realizing the risks.
Regulators worry that this could create a risk of a bank run in a crisis - if people believe a stablecoin is as good as a bank account and it starts to have problems, they may rush to redeem it, potentially triggering broader market stress.
Therefore, the rule of not paying interest forces stablecoin issuers to hold reserves but not engage in any lending or pursue returns through risky behavior, which greatly reduces the risk of a run (because reserves are always equal to liabilities).
This division protects the stability of the financial system by preventing large-scale flows of funds into unregulated quasi-banking instruments.
Effectiveness, Practicality and Impact
The direct result of this bill is to bring stablecoins fully under regulatory jurisdiction, making them safer and more transparent.
Currently, stablecoin issuers like Circle (USDC) and Paxos (PayPal USD) voluntarily comply with strict state-level regulations, particularly New York’s fiduciary framework, but no uniform federal standards exist.
These new laws will establish uniform national standards and provide greater protection for consumers by ensuring that every dollar in a stablecoin is truly backed 1:1 with a high-quality asset, such as cash or short-term Treasury bills.
This is a major win: it solidifies trust and makes stablecoins safer and more trustworthy, especially after major events like the collapse of UST and Silicon Valley Bank (SVB).
Furthermore, by making it clear that compliant stablecoins are not securities, the ongoing threat of an unexpected SEC crackdown is eliminated, shifting regulatory authority to more appropriate financial stability regulators.
When it comes to innovation, these bills are surprisingly forward-looking.
Unlike earlier, strict proposals, such as the initial STABLE draft in 2020, which only allowed banks to issue them, these new bills provide a path for fintech companies and even big tech companies to issue stablecoins, either by obtaining a federal license or partnering with a bank.
Imagine a company like Amazon, Walmart, or even Google launching a branded stablecoin and having it widely accepted on their massive platforms.
In 2021, Facebook was way ahead of its time when it tried to launch Libra. In the future, every company may have its own branded dollar. Even influencers and other private individuals may launch their own stablecoins…
Would you buy, say, ElonBucks? Or Trumpbucks?
We are ready.
However, these bills are not without their own finely calibrated trade-offs.
No one can yet foresee what the future of decentralized stablecoins will hold. What is certain is that they will struggle to cope with capital reserve requirements, license fees, ongoing audits, and other compliance costs. This could inadvertently favor industry giants like Circle and Paxos while squeezing out smaller or decentralized innovators.
So what happens to DAI? If they can’t get a license, they may have to exit the US market. The same applies to Ondo, Frax, and Usual. Currently none of them meet regulatory requirements in their current state. We may see a massive shakeout later this year.
in conclusion
The United States’ efforts to promote stablecoin legislation demonstrate the tremendous progress made in the relevant discussions in just a few years.
What was once on the fringe is now at the forefront of a new financial revolution and is on the verge of official regulatory recognition, albeit with strict conditions attached.
We’ve come a long way, and these bills will unleash a new wave of stablecoin issuance.
The GENIUS Act leans slightly toward allowing market innovation (such as interest payments or new technologies) within a regulatory framework, while the STABLE Act takes a more cautious approach in these areas.
These differences will need to be reconciled as the legislative process moves forward. However, given the bipartisan support for the topic and the Trump administration’s publicly stated desire to pass a bill by the end of 2025, we can expect one of these bills to become a reality.
This is undoubtedly a huge win for our industry and the dollar.
