On June 17, the Senate passed the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, a landmark piece of legislation designed to create a clear regulatory framework for the issuance of "payment stablecoins" in the United States.
Given the size of the stablecoin market, if this Act is passed by the House, the resulting law likely would incentivize cryptocurrency firms to race to be recognized as permitted payment stablecoin issuers.
Over half of cryptocurrency transactions already involve stablecoins, and after the Senate passed the Act the market capitalization of stablecoins hit an all-time high of over $250 billion. While regulatory clarity could further accelerate market expansion, it also presents significant risks for industry executives and affiliates, given the stringent civil and criminal penalties outlined in the Act.
1. Stablecoins
Stablecoins are cryptocurrencies that are designed to maintain a stable market value. Issuers of stablecoins typically accomplish this by pegging a stablecoin's market price to a reserve asset, such as a fiat currency, a commodity, another cryptoasset, or a combination of such reserve assets.
Over 90% of stablecoins are pegged to fiat currency, and stablecoins that are pegged 1:1 to U.S. dollar reserves held by their issuer make up the largest share of the stablecoin market.
2. The GENIUS Act
The Act does not authorize the issuance of all cryptoassets that are commonly referred to as "stablecoins."
Rather, it authorizes only the issuance of a "payment stablecoin," which it defines as a digital asset "that is, or is designed to be, used as a means of payment or settlement" and "the issuer of which [i] is obligated to convert, redeem, or repurchase for a fixed amount of monetary value, not including a digital asset denominated in a fixed amount of monetary value; and [ii] represents that such issuer will maintain, or create the reasonable expectation that it will maintain, a stable value relative to the value of a fixed amount of monetary value." Act §2(22)
Under the Act, only a "permitted payment stablecoin issuer" may be authorized to issue payment stablecoins in the United States. Subsidiaries of insured depository institutions, certain federal qualified issuers (such as a federal branches of foreign banks and uninsured national banks), and certain state qualified issuers (such as state-chartered uninsured depository institutions) can apply to become permitted payment stablecoin issuers. Act § 2(23).
The Act imposes a variety of requirements on permitted payment stablecoin issuers, including complying with rules concerning the issuer's reserve of U.S. dollars or similar assets to satisfy holder redemptions.
It also requires compliance with capital, liquidity and risk management regulations, as well as anti-money laundering and sanctions laws and various consumer-protection provisions.
3. Potential Liability for Stablecoin Executives and Other Institution-Affiliated Parties
The potential penalties that can be imposed on companies that sell or issue payment stablecoins in violation of the Act are serious, including, for example, fines of $1 million for each violation involving unauthorized issuance of a stablecoin.
However, people working for or with a company doing business in the United States involving stablecoins should be aware that the Act also sets forth a variety of equally serious civil and criminal penalties that can apply directly to them.
1. False Accounting Certifications
Each month, the issuer's CEO and CFO are required to certify a month-end report regarding the issuer's compliance with certain reserve requirements. Knowingly certifying a false report subjects the CEO and CFO to criminal penalties under 18 U.S.C. §1350(c), which can include up to 20 years' imprisonment and a fine of $5 million. Act §4(a)(3).
2. False Anti-Money Laundering and Sanctions Certifications
Within 180 days after having its application approved, and annually thereafter, the issuer must certify that it has implemented anti-money laundering and economic sanctions compliance programs that are reasonably designed to prevent the permitted payment stablecoin issuer from facilitating money laundering and the financing of terrorist activities.
Any person submitting a false certification is subject to criminal penalties under 18 U.S.C. §1001, including imprisonment of up to five years generally, or 8 years if the matter involves terrorism or relates to certain enumerated criminal violations. Act §5(i).
3. Participation in Unauthorized Issuance or Sale
Any person who knowingly "participates in" the issuance of a payment stablecoin in the United States by an issuer that is not a permitted payment stablecoin issuer under the Act, can be fined up to $1 million and imprisoned by up to five years. Act §3(f).
4. Misrepresentation of Insured Status
An officer or member of an entity who knowingly participates in or acquiesces in a misrepresentation that payment stablecoins are backed by the full faith and credit of the United States, guaranteed by the United States Government, or subject to Federal deposit insurance or Federal share insurance, can be fined or imprisoned for up to 1 year. Act §4(e)(2); 18 U.S.C. §709.
5. Misrepresentation of Product as Payment Stablecoin
Any person who knowingly and willfully participates in marketing of a product in the U.S. that is not a payment stablecoin as a payment stablecoin can be fined $500,000 for each violation. Act §4(e)(3).
6. Any Violation of Act by Institution-Affiliated Parties
Finally, for any actual or attempted violation of the Act, the applicable regulator can invoke the catch-all removal and prohibition procedures often used by banking regulators to bring actions against "institution affiliated parties" of banks.
This can include directors, officers, employees, shareholders, agents and even independent contractors such as attorneys or accountants, under certain circumstances. 12 U.S.C. §1813(u). Depending on the severity of the violation, the civil money penalty for the violation can be up to $100,000 or $200,000 per violation/per day. Act §6(b).
4. Conclusion
With the Senate's passage of the GENIUS Act, payment stablecoins appear poised for substantial growth under a clearer regulatory framework. While enthusiasm within the cryptocurrency industry may be bolstered by President Donald Trump's perceived favorable stance toward cryptocurrencies, industry leaders should remain mindful of future enforcement risks.
Regulatory enforcement and prosecutorial decisions for actions issuers take during the remainder of Trump's presidency will likely be made by officials appointed by subsequent administrations, whose stance toward cryptocurrencies could be markedly less supportive.
Executives should therefore adopt rigorous compliance measures not only to capitalize on current opportunities but also to mitigate long-term enforcement risks, recognizing that today's openness may not reflect tomorrow's regulatory reality.
Originally published by New York Law Journal.
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