Guest Contributor: Bradley Suarez
This Article was adapted from a more detailed analysis posted online by Bradley Suarez Bradley Suarez, CPA | LinkedIn
Stablecoins are designed to provide price stability relative to the U.S. dollar. Yet, their history is fraught with instability—most notably Terra’s $60 billion collapse in 2022 and ongoing concerns over Tether’s reserves. This gap between promise and performance has prompted congressional scrutiny, culminating in the proposed GENIUS Act.
The Act mandates that stablecoins be backed 1:1 with Treasury assets—adopting the model used by Circle Inc.’s USDC, which enjoys strong backing from major Wall Street firms. While this approach enhances security, it does not eliminate risk. Following Silicon Valley Bank’s collapse, USDC temporarily depegged to $0.87 until the government guaranteed its reserves. This incident, along with the 2008 financial crisis that spurred cryptocurrency’s creation, underscores the vulnerabilities of bank-reliant systems.
If the Act becomes law, only USDC would meet its requirements—undermining cryptocurrency’s core principle of decentralization. Although banks could later issue compliant stablecoins, the resulting structure would still closely resemble a CBDC. Such stablecoins would remain indirectly backed by the central bank, merely inserting intermediaries, adding private fees, and limiting market participation to established financial institutions.
Alternative models better align with cryptocurrency’s decentralized ethos. DAI, for example, operates transparently as an on-chain protocol, maintaining stability through overcollateralization rather than reliance on bank deposits. Unlike Terra, which collapsed due to a flawed dual-token system, DAI’s model requires users to collateralize their loans with at least 150% of the DAI they generate. This substantial buffer mitigates volatility, allowing users to access dollar value while retaining their cryptocurrency without triggering taxable events.
For nearly a decade, DAI has maintained its peg without reliance on centralized intermediaries or traditional banking. As cryptocurrencies mature and volatility declines, such overcollateralized models may prove more resilient than fiat-backed stablecoins.
Beyond algorithmic stablecoins, other asset-backed models exist that do not require 1:1 Treasury reserves. Tether, for example, maintains a diverse reserve strategy. While 86% of its $143.7 billion in assets might meet the Act’s requirements, the remainder—including metals, Bitcoin, corporate bonds, and loans—would not. Forcing Tether to liquidate these holdings would cause unnecessary market volatility.
The true issue with Tether lies not in its reserve composition but in its limited transparency. Its one-day attestations confirm asset existence but not ownership or completeness. The Act correctly mandates full audits, but it errs in demanding exclusively Treasury-backed reserves.
A More Balanced Approach
To refine the bill while preserving innovation, Congress should consider a more flexible regulatory framework:
- Permit overcollateralized stablecoins backed by widely accepted cryptocurrencies (e.g., Bitcoin, Ethereum, XRP, Solana) provided they maintain at least 125% collateralization.
- Allow reserve diversification by requiring stablecoin issuers to hold 70% of reserves in Treasury securities while permitting up to 30% in other high-quality assets, with a 5-10% collateral buffer.
- Strengthen enforcement by incorporating automatic revocation mechanisms for issuers whose reserves fall out of compliance.
- Adopt a risk-based premium system, akin to the FDIC’s model, where issuers pay fees based on reserve composition and stability risks.
This approach would enhance regulatory oversight while fostering competition and innovation. The rigid requirements of the GENIUS Act risk consolidating stablecoin issuance within a few well-capitalized entities, stifling economic growth rather than safeguarding investors. A more nuanced framework would maintain financial stability while ensuring the U.S. remains a leader in digital asset innovation.
