Senate passes GENIUS stablecoin bill amid concerns over systemic risk

The US crypto industry is celebrating as the GENIUS Act, a framework for stablecoin regulation, was passed in the US Senate on June 17.

The bill passed 68-30 in a bipartisan effort, roughly six weeks after Tennessee Senator Bill Hagerty introduced it to the Senate. It will now head to the House of Representatives, where Congress must reconcile it with the House’s own STABLE Act, which also seeks to regulate stablecoins.

The act holds a number of provisions, from rules for issuers, Anti-Money Laundering measures and mandatory 1:1 backing of stablecoins with reserves like US dollars and short-term Treasury securities.

Lawmakers say the bill will offer clarity and stability, but economic and legal observers have noted that the backing clause of the GENIUS Act could pose a systemic risk to the US monetary system.

Senators claim GENIUS bill strengthens Treasury demand

Hagerty said, “This bill will cement U.S. dollar dominance, it will protect customers, it will drive demand for U.S. treasuries.”

The GENIUS Act’s preference for US Treasurys as a backing asset has concerned some observers. Professor Yesha Yadav at Vanderbilt University and Brendan Malone, who formerly worked in payments and clearing at the Federal Reserve Board, released a paper on June 10 detailing their position.

The bill, according to crypto-focused lawyer Aaron Brogan, “deputizes stablecoin issuers as wholesale buyers of U.S. debt. The 1-1 collateral rule funnels new token revenue into Treasury bills.”

The authors are concerned that backing stablecoins is not scalable with the current state of the US Treasury market. Yadav and Malone say that Circle has a circulating supply of $60 billion, while around $900 billion is traded in secondary Treasury markets.

This means that currently, if an issuer like Circle were to liquidate its assets, there will likely be sufficient counterparties to which it could sell its Treasurys.

However, this is subject to change if the stablecoin market continues to grow, which the authors note it has:

“Stablecoins have experienced surging growth in the last five years, with issuance expanding from around $2B in 2019 to around $230B in outstanding claims by the first quarter of 2025.”

Furthermore, the Treasury market has run into liquidity problems in recent years, which are the result of several factors:

High-speed, automated securities dealers are providing stiffer competition to primary lenders.
Post-2008 regulations require banks to have “deeper rainy-day buffers of capital.”
(1) and (2) combined mean banks “confront powerful incentives to avoid” participating in Treasury markets.
Outstanding tradable Treasury debt (which a Treasury security represents) has grown from $4.8 trillion in August 2008 to $28.6 trillion by March 2025.

These factors combined mean that there are fewer counterparties available to purchase the type of large-scale movements of debt one would expect if a stablecoin firm were to experience insolvency and there were a run on redeeming its tokens.

The authors note that neither the illiquidity of Treasury markets nor the possibility of a stablecoin issuer is hypothetical. Circle saw $2 billion in USDC (USDC) removed from circulation in the days following the collapse of its banking partner, Silicon Valley Bank.

Treasury markets saw a liquidity crunch in March 2020, during the COVID-19 market chaos, where investors could not find counterparties to trade their Treasurys, “causing prices to become deeply distorted.”

This happened again in April 2025 when US President Donald Trump made radical shifts in US trade policy with new tariffs: “Treasuries trading experienced severe illiquidity and unusual price movements. Investors could not trade smoothly, invariably triggering concerns about the causes of this latest breakdown.”

So, what does it all mean?

Yadav and Malone state that increasingly illiquid Treasury markets and the quickly growing stablecoin ecosystem both create risks for each other.

In the event of a large stablecoin issuer experiencing a run on stablecoins, illiquidity in Treasury markets and a lack of counterparties could prevent the issuer from being able to sell its securities, and it would become insolvent.

This could also affect the credibility of Treasury markets. “Growth of the stablecoin industry appears to be taking place without significant regard for the capacity of the Treasury market to sustain this growth in practical terms,” the authors state.

Increasing demand from the stablecoin sector could also crowd out other borrowers who want to include Treasurys in their portfolios.

It could also change US financial policy and decisions on how the government funds itself. Short-term obligations make up around one quarter of total Treasury debt. Preference for 10- and 30-year bonds “means that policymakers can typically plan out various initiatives that require decades-long spending.”

Under the GENIUS Act, stablecoin issuers should preferably back their assets with short-term Treasurys. If the current composition of Treasury debt shifts to favor the short term:

“Regulatory objectives for stablecoins may well shape how the US government funds itself and the costs that it has to pay to do so.”

Yadav and Malone conclude with three policy implications:

Regulatory coordination between stablecoin policymakers and the overseers of Treasury markets
Ensure market-making practices in secondary Treasury markets can manage increased demand from stablecoin issuers
Maintain the country’s creditworthiness.

The growing interconnection between Treasurys and stablecoins “signals a policy imperative to ensure that the advantages of each amplifies the other, rather than their fragilities undermining the whole.”

To their credit, regulators appear to be making changes to limit these risks, but it remains unclear how effective it will be.

Support for stablecoin bill in US House of Representatives

Before the GENIUS Act can potentially impose systemic risks on the American financial system, it first has to pass the House of Representatives.

The bipartisan hurdle for crypto may well be over with the vote in the Senate. Last year, the House of Representatives voted and passed a crypto bill, which was sent to a Democratic Senate, where it failed to make it on the docket.

If members are just as amenable to pro-crypto legislation as they were last year, the remaining issue is to reconcile the bill with the House’s Stablecoin Transparency and Accountability for a Better Ledger Economy (STABLE) Act.

Per a report from blockchain intelligence firm TRM Labs, “the two bills differ in structure and scope, both reflect a growing bipartisan understanding that stablecoins.”

Key issues for discussion include “the structure of federal oversight, coordination with state regulators, and the regulatory treatment of algorithmic stablecoins.”

Political concerns, namely the degree to which Trump could profit from the bill, still linger. Senator Elizabeth Warren said, “This is a bill that was written by the industry that will supercharge the profitability of Donald Trump’s crypto corruption, while it undercuts consumer protection and weakens our national defense.”

Ranking Democratic Congresswoman on the US House Committee on Financial Services Maxine Waters has been a vocal critic of Trump’s activities in the crypto world. Waters and other high-ranking opponents to the industry could hold up the bill.

Democrats on the fence may also be swayed by Trump’s increasing involvement with the industry — which many in the crypto space see as deligitimizing — and the president’s tanking approval ratings.

Magazine: Arthur Hayes doesn’t care when his Bitcoin predictions are totally wrong