On Sunday Punchbowl News published the latest edits to draft stablecoin legislation, the Genius Act, which is expected to receive a Senate vote in the next two weeks. While there’s been talk of many changes, most of them were made before the successful procedural (cloture) vote on 19 May and we previously covered them here. One area worth highlighting is how some of the changes address potential conflicts of interest.
While the Trump family’s crypto activities have attracted a lot of attention, there’s another conflict lurking in the legislation. The US Treasury is responsible for the issuance of Treasury debt. Giving it significant influence over stablecoin issuers puts it in the position of power over significant investors in those Treasuries. This pattern of Treasury financing needs influencing regulatory policy has emerged elsewhere, with the administration reportedly preparing to ease bank capital requirements partly to encourage more government debt purchases. With stablecoin market cap approaching $250 billion and potentially reaching $2 trillion soon, these conflicts could have significant implications for Treasury financing.
During Congressional testimony last month, Treasury Secretary Scott Bessent said, “with stablecoin legislation, there is speculation that there may be up to $2 trillion of demand over the next few years for US government securities from digital assets.”
Stablecoin impact on debt servicing costs
Recent research by the BIS, the central bank to central banks, quantified the potential significant impact that stablecoin demand can have on short term Treasury rates. Higher demand from stablecoins lowers the cost of servicing the Treasury debt. This potential for stablecoins to influence Treasury funding costs raises questions about which regulators should oversee this growing market.
A notable feature of the stablecoin legislation is that most regulatory authority flows to Treasury and other banking regulators rather than the Federal Reserve. This may reflect the Federal Reserve being viewed as less enthusiastic about digital assets, or the current administration’s preference for limiting its powers. However, since stablecoins could become a significant component of the monetary system, restricting the Federal Reserve’s role in their regulation could potentially affect its ability to conduct monetary policy effectively.
The Treasury’s influence over investors in its debt might be viewed as a positive thing, but administrations change, so these powers could also encourage reckless spending. Hence, clauses to constrain Treasury powers have been added to the Genius Act.
Similar tensions between Treasury financing needs and regulatory policy have emerged elsewhere, with the administration reportedly preparing to ease bank capital requirements partly to encourage more government debt purchases.
New Genius Act restrictions on Treasury powers
The Genius Act allows the Treasury Secretary to grant ‘safe harbor’ exceptions to permit otherwise unqualified stablecoin issuers, including under ‘unusual and exigent circumstances.’ A recent amendment requires the Secretary to justify these exigent exceptions to the Senate Banking Committee and House Financial Services Committee.
Similarly, while the Secretary can recognize foreign stablecoins from countries with equivalent regulations, amendments now require published justification and give the Stablecoin Certification Review Committee – consisting of Treasury, Federal Reserve, and FDIC chairs – the power to reject such decisions.
While both the above changes were included in the draft before the successful 19 May procedural vote, a more recent change relates to reciprocal agreements with foreign stablecoin regulators. While the Secretary can decide on reciprocal arrangements, the requirements have been tightened from having similar standards in place for stablecoin issuers to also requiring that the jurisdiction has adequate anti-money laundering and compliance standards and sufficient supervisory and enforcement powers.
The restrictions added to the Genius Act acknowledge the inherent tension in giving Treasury extensive power over stablecoin issuers who are major buyers of Treasury debt. However, these safeguards primarily focus on procedural oversight rather than addressing the structural conflict itself. As stablecoins become more integral to the financial system, this tension between Treasury’s dual roles as debt issuer and having influence over stablecoin regulation may require more fundamental separation of authorities.
