The GENIUS Act Is a Good Start, but Congress Could Make It Smarter

Last week, Vice President JD Vance even took a clear principled stance, arguing that the United States should not have “a dictatorial government that tells certain industries they’re not allowed to do what they need to do,” and that the government should “let people make these decisions on their own.”

Ignoring the question of why these same ideas shouldn’t apply to the rest of Americans’ economic decisions, Vance is right.

Financial Regulation Should Focus on Fraud Protection

Financial regulation does not have to be based on restricting what people can do with their money, especially not because government officials think certain products or behaviors are “too risky.” It would be a very different approach from what the United States has done for the past 100 years, but financial regulation should be based on rules that mainly protect people from fraudulent behavior.

In the case of stablecoins, regulation that protects from fraudulent behavior would be straightforward, focusing on the reserves they use to maintain a stable value.

Most stablecoins try to achieve a stable value by using cash and short-term securities (often U.S. Treasuries) as collateral. In these cases, anyone holding a stablecoin is supposed to be able to convert back to dollars seamlessly, without losing value. So, verifying that a stablecoin issuer really has the “reserves” it advertises is a key regulatory function.

It really should be that simple, but it seems the GENIUS Act negotiations are headed in the wrong direction.

Making the GENIUS Act Smarter

As my colleague Jennifer Schulp has pointed out, at least two problems run counter to the goal of fostering innovation and competition in the payments sector. (By the way, the GENIUS acronym stands for Guiding and Establishing National Innovation for U.S. Stablecoins.)

First, the Senate is effectively prohibiting large nonfinancial firms—Walmart, Google, Apple, etc.—from issuing stablecoins. Some elected officials want to explicitly prohibit everyone other than federally insured banks from issuing stablecoins, so I suppose this provision could be worse. Still, the hostility toward large nonfinancial companies is a harmful restriction on competition, one that fails to create a neutral regulatory environment or create a level playing field for issuers.

Another problem is that the Senate wants to make the Fed, the Treasury, and the Federal Deposit Insurance Corporation part of a “Stablecoin Certification Review Committee.” This committee would, among other things, have to sign off on state regulatory regimes for “smaller” stablecoin issuers to operate under a state-based regulatory framework.

This feature is dangerously close to violating Vice President Vance’s recently espoused principles and surely violates the spirit of a free enterprise system. It also runs counter to the goal of fostering innovation and competition in the payments sector.

Financial Stability Regulations Are Not Genius

And there’s one more looming problem with the Senate’s approach—it doubles down on “financial stability” regulation. For instance, the GENIUS Act requires the Comptroller of the Currency to issue regulations to “ensure financial stability.” Unfortunately, this approach fits perfectly with the grossly ineffective regulatory framework we already have. Federal regulators have been trying to ensure financial stability for decades, long before the 2008 financial crisis. It does not work.

At best, it gives federal officials the discretion to dictate behavior based on virtually any conceivable potential risk. It gives them the ability to tell people what they can do with their money to reach a regulatory goal that can only be achieved by prohibiting people from taking risks.

The history of financial regulation has clarified the problems with this approach, but somehow that history still gets badly distorted. The federal financial regulatory framework has repeatedly failed to maintain financial stability or protect taxpayers, so it makes little sense to keep doubling down on the failed approach.

Still, critics of crypto want more government involvement to maintain stability, and this is a source of problems in both the overall financial regulatory framework and the approach shaping up in the GENIUS Act.

It’s also a problem that comes from the fear of allowing private sector companies to operate too freely with people’s money. But the monetary system, though heavily regulated, already consists mostly of privately created money. And the payments sector, though heavily regulated, already relies on many private sector companies.

In many respects, crypto is a response to the inefficiencies in the payments sector caused by too much government involvement, so it would be counterproductive to squash this new technology before it can improve the payments system.

Many critics want a fully public system, but a private system, with strong property rights and government fraud protection, would be superior to a fully public system. Payments systems are not an exception to the superiority of free enterprise.

Simplicity is Genius

Providing a simple framework for fully backed stablecoins, one that prohibits fraud and makes it easy to verify reserves, should be a no-brainer. It’s a great way to let people determine if the technology is worthwhile, just like Vice President Vance suggests. If the fully backed tokens work as some people think they will, it will only strengthen the payments system and the status of the U.S. dollar.

Members of Congress should recognize that it makes little sense to double down on the overly paternalistic and prescriptive federal regime that’s already in place.

The current approach trusts regulators’ judgment instead of the judgment of people using the markets every day. Expanding that approach will ensure that regular Americans continue to lose their ability to do what they want with their money.

It will not prevent financial crises, but it will deliver even more rules and directives that enrich the well-connected and harm regular Americans. Surely Congress can do better.

Then, they can work with the administration to apply Vice President Vance’s principles to the rest of the economy.