The Genius Act May Reshape the Crypto Assets Industry Landscape

The U.S. Senate recently passed the "Guidance and Establishment of a National Stablecoin Innovation Act" ( Genius Act ), which is the first comprehensive federal regulatory framework for stablecoins. The bill has now been submitted to the House of Representatives, and the House Financial Services Committee is preparing related texts for negotiation. If all goes well, the bill is expected to be signed into law before this fall, which will greatly change the landscape of the Crypto Assets industry.

The strict reserve requirements and nationwide licensing system of this bill will determine which blockchains are favored, which projects become important, and which tokens are used, thereby affecting the direction of the next wave of liquidity. Let's delve into the three major impacts the bill will have on the industry if it becomes law.

1. Payment-type alternative tokens may disappear quickly

The Senate bill will create a new "licensed payment stablecoin issuer" license and require each Token to be backed 1:1 by cash, U.S. Treasury securities, or overnight repurchase agreements (repos). Issuers with a circulation exceeding $50 billion will need to be audited annually. This stands in stark contrast to the current system, which has almost no substantive guarantees or reserve requirements.

This clear regulation comes at a time when stablecoins are becoming the main trading medium on the blockchain. In 2024, stablecoins will account for about 60% of the value of Crypto Assets transfers, handling 1.5 million transactions daily, with most transaction amounts being below $10,000.

For everyday payments, it is obviously more practical to have a stablecoin Token that maintains a value of 1 dollar compared to most traditional payment alternative Tokens, whose prices may fluctuate significantly in a short period.

Once the stablecoins licensed in the United States can be legally circulated across states, merchants that still accept volatile Tokens will find it difficult to justify the additional risk. In the coming years, the practicality and investment value of these alternative Tokens may significantly decline unless they can successfully transform.

Even if the Senate's bill does not pass in its current form, the trend is already evident. Long-term incentives will clearly favor dollar-pegged payment channels rather than payment-type alternative Tokens.

2. The new compliance rules may actually determine new winners

The new regulations will not only provide legitimacy for stablecoins; if the bill becomes law, it will ultimately effectively guide these stablecoins towards blockchains that can meet auditing and risk management requirements.

Ethereum currently hosts approximately $130.3 billion in stablecoins, far exceeding any competitor. Its mature decentralized finance (DeFi) ecosystem means that issuers can easily access lending pools, collateral lockers, and analytical tools. Additionally, they can also piece together a set of compliance modules and best practices to attempt to meet regulatory requirements.

In contrast, the XRP ledger ( XRPL ) is positioned as a compliance-first tokenized currency platform, including stablecoins. In the past month, fully supported stablecoin tokens have been launched on the XRP ledger, each with built-in account freezing, blacklisting, and identity screening tools. These features align closely with the requirements of the Senate bill that issuers must maintain strong redemption and anti-money laundering controls.

The compliance system of Ethereum may cause issuers to violate this requirement, but it is currently difficult to determine how strict the regulatory agencies' requirements are in this regard.

Nevertheless, if the bill becomes law in its current form, large issuers will need real-time verification and plug-and-play "know your customer" ( KYC ) mechanisms to remain broadly compliant. Ethereum offers flexibility, but the technical implementation is complex, whereas XRP provides a streamlined platform with top-down control.

Currently, these two blockchains seem to have advantages compared to chains that focus on privacy or speed, the latter of which may require expensive modifications to meet the same demands.

3. Reserve rules may bring institutional capital influx to the blockchain

Since each dollar stablecoin must hold an equivalent amount of cash-like asset reserves, this bill quietly ties the liquidity of Crypto Assets to U.S. short-term debt.

The stablecoin market size has surpassed $251 billion. If institutions continue to develop along the current path, it could reach $500 billion by 2026. At this scale, stablecoin issuers will become one of the largest buyers of U.S. short-term government bonds, using the returns to support redemptions or customer rewards.

For blockchain, this connection has two aspects of significance. First, the demand for more reserves means that more corporate balance sheets will hold government bonds while also holding native Tokens to pay for network fees, thereby driving organic demand for Tokens such as Ethereum and XRP.

Secondly, the interest income from stablecoins may provide funding for incentives for aggressive users. If issuers return a portion of government bond yields to holders, using stablecoins instead of credit cards may become a rational choice for some investors, thereby accelerating on-chain payment volume and fee throughput.

Assuming the House retains the reserve clause, investors should also expect an increase in currency sensitivity. If regulators adjust collateral eligibility or the Federal Reserve changes the supply of government bonds, the growth of stablecoins and the liquidity of Crypto Assets will fluctuate in sync.

This is a notable risk, but it also indicates that digital assets are gradually integrating into the mainstream capital markets, rather than being separate from them.