The GENIUS Act is a new federal law that regulates U.S. dollar-backed stablecoins. It establishes clear guidelines for how these coins can be issued, what they must be backed by, and the compliance standards they need to meet. Stablecoins are special types of cryptocurrencies designed to keep their value steady. They often peg their value to a reserve asset, like the U.S. dollar, euro, or gold. People use stablecoins for various purposes, such as making digital payments, trading cryptocurrencies, borrowing, and participating in decentralized finance (DeFi).

Key Features of Stablecoins

Stablecoins have several important features. They aim for price stability, where one stablecoin is meant to equal one U.S. dollar. They are backed by reserves, which could be cash, commodities, or other cryptocurrencies. They help facilitate quick, low-cost international transactions, support cross-border money transfers, and provide a stable value in fluctuating economies. Under the GENIUS Act, only federally approved banks, licensed nonbanks, and state-regulated entities can issue stablecoins. Each stablecoin must be backed one-to-one by liquid reserve assets, and issuers must publicly disclose their reserves monthly. In case of bankruptcy, stablecoin holders will have priority to claim those reserve assets. Issuers must comply with the Bank Secrecy Act, including rules against money laundering. Both federal and state regulators will oversee compliance, and the law restricts foreign issuers to safeguard U.S. interests. The goal is to uphold the dominance of the U.S. dollar and ensure national financial security. This law brings clarity to the $260 billion stablecoin market, allowing traditional banks to issue compliant stablecoins while ensuring consumer protections. It helps position the U.S. as a leader in regulating digital assets. We expect this law will significantly lower risk for U.S. dollar-backed stablecoins. The chances of experiencing severe drops in value, like the dramatic de-pegging of TerraUSD in 2022, are likely coming to an end for regulated stablecoins. This should mean less price fluctuation for compliant stablecoins, making long volatility strategies less effective.

Anticipated Market Shift

We expect a significant change in the underlying assets for crypto derivatives as the market adapts to these new rules. Right now, Tether’s USDT is the leader with a market cap over $110 billion, but its transparency regarding reserves has been questioned. As regulated issuers become more prominent, we might see a shift towards higher-quality alternatives like Circle’s USDC, potentially changing the most popular trading pairs for futures and perpetual swaps. With clearer regulations, traditional financial institutions are likely to enter this space and create regulated derivative products. Picture futures contracts based on a basket of compliant stablecoins or options available on well-known exchanges like the CME. This will open new opportunities for hedging and speculation beyond current decentralized platforms. This legislation provides the needed clarity to encourage more institutional investment in the $162 billion stablecoin market. We expect a rise in overall trading volume and liquidity as a result. For derivative traders, this means tighter bid-ask spreads and deeper order books, lowering transaction costs for major trading pairs. We can look at history for guidance, such as the 2014 money market fund reforms. After these changes, hundreds of billions quickly shifted from prime funds to government funds. A similar swift capital reallocation might happen within the stablecoin ecosystem, and traders should prepare for this potential transition. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now