Although Congress sought to provide a thorough legal scaffold for dollar-linked tokens with the GENIUS Act, Federal Reserve officials are warning that persistent statutory gaps and fragmented supervision could leave the burgeoning stablecoin market exposed to liquidity shocks and consumer harms, particularly if issuers rely on uninsured deposits or loosely defined overnight repurchase arrangements as reserve assets. Fed Governor Barr and other officials contend that, despite the Act’s intent to standardize issuance and reserve requirements, ambiguities in definitions and a diffusion of supervisory authority create avenues for regulatory arbitrage and inconsistent protections across jurisdictions. The GENIUS framework mandates one-to-one backing and enumerates eligible reserve instruments—physical currency, Treasury bills, repurchase agreements and similar high-liquidity assets—but it also permits uninsured deposits and certain overnight repo structures that behaved vulnerably during the March 2023 banking stress. That inclusion, critics argue, reintroduces run dynamics and counterparty exposures into a market meant to operate as a safe, low-volatility payment rail. The Act’s transparency provisions, which require periodic reporting and third-party audits by registered accounting firms, aim to mitigate information asymmetry, yet audit lag, valuation complexity and heterogeneous repo terms may blunt those safeguards in times of rapid liability withdrawal. These vulnerabilities echo the brutal realities of supply shocks seen in crypto markets, where sudden liquidity pressures expose naive blind spots in oversight. Complicating the regulatory landscape is the distribution of supervisory roles among four federal agencies alongside state regulators, producing overlapping jurisdiction and the risk of divergent enforcement. Trust banks chartered under the Act could pursue activities that stretch or bypass traditional fiduciary constraints, increasing systemic interconnectedness with the banking sector and raising questions about appropriate capital and liquidity backstops. Effective coordination mechanisms, substantial rulemaking and cross-jurisdictional protocols remain necessary to reconcile standards and close enforcement gaps. Consumer protection concerns persist because narrow statutory definitions exclude some digital assets from the Act’s remit, limiting fraud recourse and error-resolution pathways that exist in established payment systems. Policymakers must weigh the benefits of innovation and financial inclusion against the need for robust reserve quality, clearer legal definitions and unified supervision to reduce contagion risk and preserve confidence in dollar-linked tokens. The law also aligns with international trends emphasizing reserve requirements, transparency and AML/CFT compliance.
