Challenging the draft GENIUS Act, venture capital firm a16z warned U.S. regulators that overly broad application of the bill to decentralized stablecoins could stifle innovation and damage the nascent DeFi ecosystem. The firm argued that decentralized protocols operate through autonomous smart contracts and distributed governance, a fundamentally different model from custodial, fiat-backed stablecoins that rely on centralized reserves and institutional custody, and that failure to recognize this distinction risks misapplying legacy banking rules ill-suited to blockchain-native systems. A16z cautioned that the draft’s expansive definitions and compliance expectations could produce unintended consequences, including driving developers, liquidity, and engineering talent offshore to more permissive jurisdictions, thereby undermining the very market competitiveness the legislation aims to cultivate. The firm noted regulators have been urged to consider modern cryptographic tools in policymaking, including zero-knowledge proofs, to enable compliance without exposing private data.
a16z warned that applying the GENIUS Act broadly to decentralized stablecoins risks stifling DeFi innovation and driving talent offshore
The firm urged a recalibration of regulatory scope, recommending clear statutory definitions that distinguish decentralized stablecoins from payment-focused, custodial instruments, to promote fair competition and innovation-friendly oversight while reducing opportunities for regulatory arbitrage. A16z also articulated a concrete technological vision for compliance that preserves privacy: decentralized digital identity frameworks and zero-knowledge proofs (ZKPs) were proposed as mechanisms to meet anti-money-laundering and know-your-customer objectives without wholesale surveillance. By enabling proof of compliance through cryptographic attestations, these approaches aim to protect civil liberties and strengthen national security simultaneously, the firm argued. In its public submission, a16z referenced a recent Treasury-focused letter warning of overreach to underscore these points.
A16z further recommended that FinCEN exercise its exceptive relief authority to permit verification of users via digital wallets and recognize decentralized identity as a permissible non-documentary compliance method under the Bank Secrecy Act, thereby integrating innovations like multi-party computation (MPC) into mainstream compliance workflows. The firm emphasized that less than one percent of on-chain activity is illicit, contending that smarter, tech-driven compliance can be more effective and less intrusive than legacy AML/KYC regimes that rely on centralized databases.
While acknowledging regulatory imperatives around consumer protection and systemic risk, a16z framed its recommendations as pragmatic steps to balance security, privacy, and innovation, noting uncertainties remain about implementation, enforcement, and international coordination as the United States seeks a competitive posture in the global stablecoin market.
