FWIW # 51 - Thoughts on The Genius Act

 July 18, 2025, President Trump signed the Genius Act (GA) into law. The ramifications of this legislation won’t be known for years, if not for a whole generation. It’s too early to surmise and speculate about the good and bad aspects of the law, but knowing and understanding some of its framework is important. I’m not a lawyer or a lobbyist, so what you’re about to read may end up being incomplete or misinterpreted. What is important is having formulated an analysis so that as events unfold over the next three years, that opinion may be validated or found to be wrong; either is enlightening. If an opinion is not formulated, the ramifications of what is unfolding won’t be known and will come as a complete surprise and a potential problem for a portfolio.

This essay will be disjointed in that it will discuss pertinent aspects of the GA as independent concepts or thoughts. You may want to have a pencil handy so you can either accept or reject the analysis.

The word burn doesn’t appear anywhere in the GA, but it’s vital to consider its use in the context of all crypto. It means permanently removing coins from circulation. It can happen when the coin issuer does so, but it can also happen when someone else hacks into your crypto wallet and burns the coins into a third party’s wallet, where they can’t be retrieved. Read the suggested article at the end of this discussion to learn more.

The Purpose of the GA

The initial purpose of the GA is to set in place rules and regulations for entities to become permitted payment stablecoin issuers (PPSIs). In essence, any entity that is a PPSI is creating private money. This concept of private money is not new to the US. Prior to 1935, bank notes (currency) were issued around the country.

The number $10 billion is the cutoff between a PPSI that must be federally regulated and one that can be state regulated. A foreign PPSI must be regulated by their home country to the satisfaction of the US federal regulators. This is, to me, a red flag to be cautious about.

The bottom line is that the PPSI should have reserves equal to $1 for every $1 stablecoin they have issued. The PPSI is restricted by law from paying any interest or capital increase to customers who give them money in exchange for a stablecoin.

Types of Stablecoins

Who knew there are four types of stablecoins?

1. stablecoins backed on a 1:1 basis by a fiat currency (not necessarily the US dollar)
2. commodity-backed stablecoins
3. crypto-backed stablecoins
4. algorithmic stablecoins

The GA covers only fiat-backed stablecoins. That’s important to understand, and it should also enable you to recognize the other types when they attempt to look like the regulated type. The secretary of the Treasury is tasked with studying the crypto-backed stablecoins and reporting to Congress when that study is complete. It’s hard to believe the study won’t suggest permitting the sale of a crypto-backed stablecoin to US customers. It’s interesting to note, the legislation specifically excludes the algorithmic stablecoin even if it’s backed 1:1 by a fiat currency. Why? Because the algorithmic formula has been tried at least twice and ended in disaster, with hundreds of millions of dollars lost both times.

The GA should be considered the first of many crypto legislative efforts to come. The regulatory framework will likely be used to expand regulation covering these other coins when the government chooses to do so.

Types of Digital Ledger Technology (DLT) Platforms

It’s likely all of us have heard of blockchain. But who has heard of DAG, Hashgraph, Holochain, or Tempo (Radix)? Each of these technologies uses different methods of recording a transaction. It will be interesting to see how the regulators mesh the recordkeeping of these different platforms, each with their own advantages and issues.

Implementation

In the GA, there are several timelines. They all specify periods allowing regulators or the secretary of the Treasury to develop concrete language for implementing the GA. There appears to be a three-year period before full implementation. What’s interesting about that timeline is its proximity to the end of President Trump’s term in office. His successor will experience the full impact of the legislation.

It appears to me that the point of a stablecoin is to make it easier to speculate in other crypto coins and for other crypto coins to interact with the economy. For example, a speculator who has large gains in Bitcoin may use it to buy a PPSI stablecoin and then use that stablecoin to buy a house, a car, or other goods or services. They could also redeem the stablecoin for US dollars. By moving from an investment coin to a fiat-backed payment coin, the owner of the investment coin transfers price volatility to the PPSI, who will accept and, I’m sure, will have a mechanism for modifying the risk. As can be seen, the payment stablecoin will be the gateway to the broad economy for unlocking the value of other crypto coins.

Anti-Money Laundering Efforts

As you can likely imagine, significant attention was given to writing language that will keep criminals from using fiat-backed stablecoins issued by a PPSI to launder illicit money. To those legislators, I say, “Good luck.” The current global banking system has stringent money laundering rules and regs, and each year we hear about one bank or another being fined millions of dollars because they were a conduit for criminal money. It’s highly unlikely that any rule can be written that truly protects against money laundering when the lowest employee in the organization, not making a huge salary, can be the point of entry for illicit cash. Besides, in the spectacular money laundering cases in Europe and elsewhere, senior management was instrumental in criminal activity. Recently, I read an article describing how a foreign-domiciled stablecoin issuer flew a plane to a Middle Eastern country to pick up crates of currency in exchange for their stablecoin. It’s likely that same stablecoin issuer will be the first foreign PPSI.

A great deal of the GA is spent defining and modifying which sections of comprehensive US law impact the use of PPSI stablecoins. The language throughout the GA leads a reader to realize the importance of understanding what is not said as well as what is enunciated in the legislation.

PPSI Bankruptcy

One aspect that I found most interesting deals with the bankruptcy of a PPSI. Section 11, page 108, line 16, introduces the word ratable. This implies that the bankrupt PPSI may not have a 1:1 reserve. Section 2, page 9, lines 4–5, says “(II) represents that such issuer will maintain, or create a reasonable expectation that it will maintain, a stable value relative to the value of a fixed amount of monetary value.” So, there appears to be wiggle room between a 1:1 value and reality. As I said earlier, I’m not a lawyer or lobbyist, but it’s important to be sensitive to any wording about the reserves in a PPSI’s document.

Finally, there is no doubt in my mind that the flow of money into PPSIs will be huge in the beginning. I also believe this is the first step in developing a global currency fostered by the globalists. What is most important to me is watching how financial service companies and the general corporate world handle the new concept of PPSIs. In my professional opinion, the first few years will see PPSIs flourish. An eventual stumble by one or more entities will lead to consolidation. It will be important to track the traditional banks and brokerage firms to confirm their participation as a PPSI is clearly in a separate subsidiary away from traditional custodial services. The dynamics of the PPSI reserve requirements will increase the demand for short-term US Treasury securities, causing a steepening of the yield curve. This has interesting ramifications for portfolio management.

            Now you know a little more about fiat-backed payment stablecoins and the regulated PPSI companies issuing the coins. What you need to do now is read this article in the Wall Street Journal from July 20, 2025. Reread the whole article several times, but reread the fourth paragraph at least 10 times. Then answer the question: If a government with the sophistication of Iran can find its digital currency and stablecoins disappeared and “burned,” how exposed are you and your favorite PPSI?

https://www.wsj.com/opinion/predatory-sparrow-hacks-irans-financial-system-attack-stablecoins-ad6e79b5?mod=opinion_feat2_commentary_pos1