Stablecoins Get a Federal Framework: Will the US GENIUS Act Deliver Stability or Fragmentation?

On July 18, 2025, President Trump signed the Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS Act) into law, making the United States the first major economy to implement a comprehensive federal framework for fiat-backed stablecoins. While the Act represents a critical milestone in the regulation of digital assets, its complex design raises concerns about unintended consequences—particularly market concentration, interoperability failures, and barriers to innovation. These issues could ultimately undermine the stability and inclusivity the Act purports to promote.

A Structured But Rigid Framework

The GENIUS Act defines ‘payment stablecoins’ as digital assets used for payments or settlement that maintain 1:1 backing with fiat currency (see Section 2(24)). The Act deliberately excludes algorithmic stablecoins and yield-bearing variants, focusing solely on fiat-collateralized instruments while directing the Treasury Secretary to study these excluded categories within one year of enactment (see Section 14).

The Act requires regulators to issue implementing rules within one year, with the framework taking effect by November 2026—18 months after enactment or 120 days after final rule issuance, whichever comes first. Only ‘Permitted Payment Stablecoin Issuers’ (PPSIs) may issue payment stablecoins after this date; custodians and intermediaries face a three-year compliance window (see Sections 3, 12, and 20).

Three pathways exist for obtaining PPSI status: subsidiaries of insured depository institutions can apply to their appropriate federal banking regulator; non-bank entities can seek approval from the Office of the Comptroller of the Currency; and smaller issuers with less than $10 billion in aggregate stablecoin value may alternatively apply to certified state regulators (see Section 2(23)). Notably, non-financial public companies face significant restrictions, requiring unanimous approval from a three-agency review committee (see Section 4(a)(12)).

Comprehensive but Burdensome Requirements

The regulatory requirements are extensive and demanding. PPSIs must comply with Bank Secrecy Act requirements, including customer identification and anti-money laundering programs (Section 4(a)(5)). Also, under Section 4, PPSIs may not pay yield or interest to holders, and reserve rehypothecation is tightly restricted. 

Section 4(e) prohibits misleading marketing, including any suggestion of government backing or legal tender status. In insolvency scenarios, stablecoin holders receive priority claims over other creditors regarding required reserves, with specific amendments to the Bankruptcy Code ensuring these protections (see Section 11).

An Important but Incomplete First Step

The GENIUS Act deserves recognition as a significant milestone in digital asset regulation. For years, the stablecoin market, which is estimated at $70 billion in daily transaction volume in the United States, has operated without clear regulatory guidance (see generally, Section 3). The Act provides essential consumer protections through reserve requirements, priority claims structures, and comprehensive oversight mechanisms that were previously absent.

However, the legislation's scope limitations present immediate challenges. By focusing exclusively on payment stablecoins, the Act leaves algorithmic stablecoins, yield-bearing variants, and other innovative models in continued regulatory uncertainty. This narrow approach, while simplifying initial implementation, may require additional legislative intervention as digital asset markets continue evolving.

Regulatory Compliance as a Barrier to Innovation

The Act’s demanding compliance obligations risk reshaping the stablecoin landscape by erecting formidable barriers to entry. The capital, liquidity, risk management, and ongoing reporting obligations impose substantial compliance costs that strongly favor large, established financial institutions over innovative startups and decentralized finance protocols.

This regulatory burden risks concentrating market power among a small number of well-capitalized entities capable of absorbing significant compliance expenses. Smaller innovators and decentralized finance (DeFi) protocols - historically the source of breakthrough developments in digital finance - may find the regulatory requirements financially prohibitive. The restriction on non-financial public companies becoming PPSIs without unanimous regulatory approval further limits potential market participants, potentially reducing competition and innovation.

The practical effect may be to transform a diverse, innovative ecosystem into an oligopolistic market dominated by traditional financial institutions and large technology companies, thereby constraining the disruptive potential that makes digital assets transformative.

The Interoperability Gap

Most troubling is the Act’s failure to mandate interoperability standards among different stablecoins. As banks, technology firms, retailers, and entrepreneurs become PPSIs, the market risks fragmenting into numerous incompatible stablecoin ecosystems. This scenario evokes the chaotic American ‘Wildcat Banking’ era of the 1800s, when hundreds of state-chartered banks issued distinct banknotes with varying values and redeemability based on each institution's reputation and financial stability.

Without mandatory mechanisms ensuring seamless exchange and compatibility between different stablecoins, we risk creating a ‘Wildcat 2.0’ environment where the digital asset landscape becomes fragmented and cumbersome for everyday transactions. This fragmentation directly contradicts the fundamental benefits that stablecoins promise—stability, efficiency, and frictionless payments.

While the Act’s rulemaking provisions authorize regulators to establish interoperability standards for digital finance transactions, including blockchain standards, this authority is discretionary rather than mandatory (see Section 13).This leaves critical uncertainty about whether regulators will prioritize addressing this fundamental structural challenge.

Cross-Border Access and Strategic Fragmentation

Foreign issuers may participate under Section 18, provided the Treasury determines their home regulatory regimes are comparable. The Treasury Department has 210 days to make this determination (Section 18(b)(2)–(3)). This framework may create competitive advantages for stablecoin issuers from jurisdictions with compatible regulatory approaches while potentially excluding others.

A Critical Juncture

The GENIUS Act’s passage marks a historic step toward regulating digital payments infrastructure, but it leaves crucial questions unanswered. Without proactive regulatory action—particularly around interoperability and market access—the Act may achieve the opposite of its stated goal: constraining innovation while failing to ensure stability. Whether the Act becomes a foundational framework or a cautionary tale depends on the choices made during the critical eighteen-month implementation period ahead.

As the financial services industry prepares for the November 2026 effective date, the fundamental question remains whether this regulatory framework will create the innovation and competition necessary for a healthy stablecoin ecosystem, or whether it will result in an oligopolistic market structure that stifles digital asset innovation.

The eighteen-month implementation period provides a crucial window for addressing these concerns through thoughtful rulemaking. However, without proactive regulatory intervention to ensure competitive markets and technical interoperability, the GENIUS Act risks achieving the opposite of its stated mission—constraining rather than guiding innovation and fragmenting rather than stabilizing the digital asset landscape.

The true test of the GENIUS Act’s success lies not in its comprehensive structure but in whether it preserves the market dynamism that makes digital assets transformative. Early indications suggest this balance may prove more elusive than legislators anticipated.

David Krause is an Emeritus Associate Professor of Finance at Marquette University.