Stablecoins at the Gates: Senate’s “Genius Act” Meets a Hard Reality Check
The U.S. Senate has “recently” passed the bipartisan Genius Act, a regulatory framework for U.S. dollar–pegged stablecoins. In an interview with Walter, a UC Berkeley professor in economics and politics argues the bill could invite “economic chaos.” Why it matters now: crypto rails are colliding with mainstream payments, big-box retailers and social platforms are eyeing issuance, and policymakers must decide who runs the future of money—commercial firms or the Federal Reserve. All references are as discussed in the interview; timeframe: current debate in 2025, currency: USD.
Quick Summary
- Senate passed the Genius Act to license and regulate USD-pegged stablecoins; House action pending.
- Issuers could include banks, tech firms, retailers; potentially “hundreds or even thousands” of coins.
- Stablecoins aim for a 1:1 peg but could trade at discounts—examples cited: 97¢ or 98¢ on the dollar.
- Analogy to money market funds “breaking the buck” underscores peg risk; no explicit FDIC-like backstop disclosed.
- Credit card fees around 2% to vendors contrasted with faster, cheaper stablecoin transfers but less protection.
- Remittances cited as a use case versus Western Union fees of 6–8%.
- Bill allows “small” issuers to be state-licensed; threshold mentioned: $10 billion of issuance.
- Run and contagion risk flagged; potential pressure for taxpayer bailouts if pegs slip—cost burden not disclosed.
- CBDC (Fed-issued) presented as a superior alternative; congressional resistance noted.
- Privacy and AML/KYC enforcement concerns if issuers are retailers or social networks (e.g., X) — details not disclosed.
Sentiment and Themes
Overall tone: Negative 65% / Neutral 25% / Positive 10%.
- Regulatory design and oversight risk
- Stability/peg integrity and run dynamics
- Financial inclusion: promise vs reality
- CBDC as the preferred architecture
- AML/KYC, privacy, and big-tech/retailer dominance
What Stablecoins Promise—and What Could Go Wrong
From a Senate win to a systemic question
The Genius Act would give stablecoins legal status through federal licensing and supervision. The pitch: a digital dollar that holds its value, issued by banks, tech companies, or retailers, and spendable across commerce. The professor’s contention: regulation does not equal certainty, and the wrong framework can fracture the “singleness of money.”
“Like Tether,” but federally blessed
In form, these coins would resemble today’s Tether—pegged to the dollar and backed by liquid reserves. The difference is legitimacy: Fed, FDIC, and OCC involvement via licensing. The core risk remains whether reserves truly match liabilities, all the time, under stress.
The money market fund warning
Recall 2008’s “breaking the buck.” Even investment-grade paper can wobble. The professor argues that trusting regulators to avoid any shortfall in any issuer, at all times, is a high bar—and stablecoins could face the same asset-valuation shocks that felled past funds.
Fragmenting the dollar
If “Walter’s coin” trades at 98¢ and “Barry’s coin” at 97¢, users would constantly re-price what should be identical dollars. This challenges the bedrock concept that every dollar is worth a dollar. The consequence: friction, confusion, and a shadow FX market inside the dollar zone.
Runs without insurance
Banks have FDIC insurance funded by bank premiums; stablecoin users, under the bill as described, do not. That gap could make holders quicker to run at the first sign of trouble—potentially spreading contagion across issuers and inviting political pressure for taxpayer-funded rescues.
Speed versus safety in retail payments
Yes, card rails are costly (around 2% to merchants) and settlement can lag, while stablecoins can be instantaneous. But card networks bundle fraud protection and credit features. A bare-bones coin may be cheaper and faster, but with fewer consumer safeguards if something goes wrong.
Inclusion and real use cases
The professor sees limited U.S. inclusion gains, though remittances could benefit relative to 6–8% wire fees. He also notes stablecoins’ role as on-ramps to broader crypto trading and, in some cases, illicit finance—raising questions about whether retailers and tech firms can truly enforce AML/KYC at scale.
Do we want Walmart (or X) running payments?
Large retailers and social networks could leverage their data and scale to dominate. That poses two risks: market power over payments and unprecedented visibility into user transactions. The trade-off between efficiency and privacy looms large.
CBDC as the cleaner path
The professor’s preferred solution is a Fed-issued central bank digital currency. Many countries are exploring it; Congress remains skeptical. His claim: a CBDC would likely become the dominant digital dollar without fragmenting value, while preserving public trust and policy control.
House tweaks that would help
He urges tighter oversight, specifically removing state-level licensing for “small” coins (below $10 billion) to avoid regulatory arbitrage and uneven enforcement. More broadly, he argues for explicit support of a Fed alternative to anchor the system.
Key Data Points from the Interview
| Figure | Context | Policy/Market Implication |
|---|---|---|
| 97¢–98¢ | Potential discount to par if coins “break the buck.” | Signals peg fragility; invites runs and user confusion. |
| 2% | Approximate merchant cost of card transactions. | Benchmark for payment cost savings from stablecoins. |
| 6–8% | Estimated traditional remittance fees. | Use case for lower-cost cross-border transfers. |
| $10 billion | “Small” stablecoin issuance threshold for state licensing. | Creates regulatory fragmentation risk; invites arbitrage. |
| Hundreds or thousands | Potential number of issuers across retailers, banks, tech. | Network effects vs fragmentation; singleness of money at risk. |
| FDIC-like insurance | Not disclosed in the bill as discussed. | Heightened run risk; potential bailout pressure. |
Analysis and Insights
Growth and Mix
Demand is likely to cluster where incumbents are weakest: point-of-sale costs, instant settlement, and cross-border remittances. If retailers and social platforms issue coins, network effects could rapidly concentrate volume. But a proliferation of “small” state-licensed coins raises fragmentation risk before consolidation occurs.
Profitability and Efficiency
Issuers could earn float on high-quality liquid reserves; margin depends on reserve yields minus operating and compliance costs. Strong AML/KYC increases opex, but inadequate controls raise legal and reputational risks. No explicit fee schedule is disclosed; consumer protection features would add cost but improve adoption.
Cash, Liquidity, and Risk
Absent an insurance fund, peg confidence rests on transparent, high-frequency attestation and liquidity management. Stress in Treasury or repo markets could challenge redemptions. Run dynamics are amplified by instant digital exits and social media. State-by-state oversight (for sub-$10 billion issuers) compounds supervisory risk.
Notable Quotes
“Economists talk about the singleness of money… that would be at risk under this stable coin regime.”
“People who hold and use stable coins are going to be more nervous… they’re going to run at the first sign of trouble.”
“Do we want our payment system run by Walmart?”
“I think the better model is the central bank digital currency.”
Conclusion and Key Takeaways
- Policy design matters: without explicit insurance and uniform federal oversight, the peg’s integrity and “singleness of money” are vulnerable.
- Private rails can cut costs and speed settlement, but they trade off consumer protection and privacy unless mandates are clear and enforceable.
- A Fed-issued CBDC could anchor the system and mitigate fragmentation; political resistance remains the gating factor.
- House catalysts to watch: removal of state-level licensing for “small” coins, stronger reserve/audit rules, and any move to study or pilot a CBDC.
- Investor lens: float income and network effects are attractive—but only if regulatory clarity, AML/KYC rigor, and liquidity buffers are credibly established.