Introduction to Stablecoins and the GENIUS Act
The United States Senate has approved a bill to regulate “stablecoins,” a type of cryptocurrency whose value is pegged to traditional assets like the US dollar. The proposed legislation, known as the GENIUS Act, sets standards for stablecoin issuers, requiring them to hold liquid assets equivalent in value to their circulating stablecoins.
Background on Stablecoins
Stablecoins are considered the safest and least volatile form of digital currencies because their value is tied to traditional fiat currency. The assets that can back stablecoins include bank deposits, short-term Treasury securities, and cash.
GENIUS Act Provisions
- Issuers of stablecoins must maintain liquid assets equal to the value of their circulating stablecoins, ensuring greater investor confidence.
- This requirement comes in response to the Terra collapse, where Terraform Labs’ stablecoin price was supposedly backed by an algorithm instead of tangible assets.
- The bill grants banking regulators the authority to oversee stablecoin issuers in the United States.
- By tying stablecoins to the US dollar, this legislation could expand the influence of the American currency in the cryptocurrency world, offering a safe haven from volatile local currencies.
Impact and Future of the GENIUS Act
The approval of the GENIUS Act in the Senate, with a vote of 68-30, sends the bill to the House of Representatives where its fate remains uncertain. Meanwhile, another cryptocurrency bill, the STABLE Act, is being discussed in the lower chamber. Lawmakers have the option to merge both bills, a process allowed by Congressional rules.
Key Questions and Answers
- What are stablecoins? Stablecoins are a type of cryptocurrency with their value pegged to traditional assets, like the US dollar, making them less volatile than other digital currencies.
- Why is the GENIUS Act important? The act aims to establish regulatory standards for stablecoin issuers, ensuring they maintain sufficient liquid assets to back their circulating stablecoins and fostering investor confidence.
- What triggered the need for regulation? The collapse of Terra’s stablecoin highlighted the risks associated with algorithms backing digital currencies instead of tangible assets, prompting calls for regulation.
- What are the implications of tying stablecoins to the US dollar? This approach could make USD-backed stablecoins a safer alternative to local currencies prone to significant fluctuations, potentially expanding the influence of the US dollar in the cryptocurrency market.
- What happens next with the GENIUS Act? The bill has been approved by the Senate and is now being considered by the House of Representatives. Lawmakers may choose to merge it with another cryptocurrency bill, the STABLE Act.
