The US Senate passed the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act last week. If it were to be signed into law, the GENIUS Act would create the first federal framework for dollar-pegged stablecoins, according to CNBC. The GENIUS Act will now go to the House for further consideration.

Stablecoins are having a moment. In addition to all the activity in Washington, the fintech and banking communities are also full of chatter, especially on the heels of major stablecoin issuer Circle’s successful IPO in early June. Potential use cases for stablecoins — which are digital currencies whose value is tied to another asset, typically a fiat currency like the US dollar — include gaming, e-commerce, and cross-border payments. 

Key highlights of the proposed legislation include:

• Issuers would be required to hold at least one dollar for every one dollar of stablecoins. Permitted reserves would be limited to “coins and currency, insured deposits held at banks and credit unions, short-dated Treasury bills, repurchase agreements (“repos”) and reverse repos backed by Treasury bills, money market funds invested in certain of these assets, central bank reserves, and any other similar government-issued asset approved by regulators.”
  
  
• It outlines how stablecoin issuers — “which could be subsidiaries of insured depository institutions (IDIs) or nonbanks (which would not be restricted to financial firms)” — would be regulated by either state or federal authorities. Any issuer with under $10 billion outstanding stablecoins would be allowed to be regulated by a state if the regime is “substantially similar to its federal counterpart.”
  
  
• Issuers would be subject to the Bank Secrecy Act. Additionally, the Financial Crimes Enforcement Network would be required to write tailored anti-money laundering rules. The bill outlines specific rules regarding foreign stablecoins.
  
  
• It would require issuers to establish and disclose stablecoin redemption procedures and provide monthly public disclosure of reserve composition. Audited annual financial statements would be required for larger issuers.
  
  
• It would prohibit misleading marketing, such as claiming stablecoins are backed by the US government or insured by the FDIC.
  
  

The GENIUS Act could create the guardrails necessary for stablecoins to reach the mainstream through a range of issuers, from banks and fintechs to retailers. For traditional institutions, this means both more opportunity and more competition. On a positive note, creating regulatory clarity should allow banks to more easily participate in the adoption of stablecoins. However, many likely lack the acumen and infrastructure to do so, especially as the digital asset space grew pretty taboo among banks in the last few years. As a result, taking advantage of this opportunity could require quite a bit of catch up. In the meantime, stablecoins may attract users away from traditional banking services — deposit migration out of community banks and its knock-on effect to local lending is one key risk noted by the Independent Community Bankers of America (ICBA).

Additionally, the bill has major implications for banks’ payments strategies. As noted by Finovate, “This method of funds transfer won’t rely on traditional rails like ACH, wires, or even FedNow. If end users and businesses get accustomed to real-time, programmable payments, their expectations may be permanently shifted, requiring banks to keep up.”

To be fair, the utility of stablecoins is not yet proven, and any major shifts will take time. But that doesn’t mean it’s safe for anyone to bury their head in the sand. As Jason Henrichs, CEO of Alloy Labs Alliance, told CCG Catalyst, “The use case that keeps being trumpeted is cross-border payments, but the reality is that is a limited application. Banks can’t afford to ignore the trend, however, as other use cases begin to reshape the landscape.”

If the GENIUS Act passes, banks across the country will need to grapple with it. That means assessing the stablecoin market and its implications for their institution, identifying potential paths forward (e.g., whether to participate as an issuer), and ultimately, charting a response to this movement. Not every bank will need to act, but every bank will need to do the work to understand where they fall. For those that decide on a proactive response, important considerations will include regulatory compliance, risk management, technology enablement, and operational support.