The GENIUS Act’s Regulatory Framework for Payment Stablecoins

The GENIUS Act will regulate the issuance and trading of stablecoins in the United States by defining a category of “payment stablecoins” and establishing regulations governing payment stablecoin issuers and intermediaries (known as digital asset service providers).

The GENIUS Act will make it unlawful for any person other than a permitted payment stablecoin issuer to issue a payment stablecoin in the United States, and digital asset service providers will be prohibited from offering or selling payment stablecoins in the United States unless the stablecoin is issued by (i) a permitted payment stablecoin issuer or (ii) a comparably regulated foreign payment stablecoin issuer (as described below).

In addition, payment stablecoins that are not issued by permitted payment stablecoin issuers cannot be (i) treated as cash or cash equivalent for accounting purposes, (ii) eligible as cash or cash equivalent margin and collateral for broker-dealers, swap dealers and other SEC- or Commodity Futures Trading Commission (“CFTC”)-regulated intermediaries or (iii) accepted as a settlement asset to facilitate wholesale payments between banking organizations (directly or through a payment infrastructure).

Definition of Payment Stablecoin

The GENIUS Act defines a payment stablecoin as a digital asset that is, or is designed to be, used as a means of payment or settlement where the issuer (i) is obligated to convert, redeem or repurchase the digital asset for a fixed amount of monetary value and (ii) represents (or creates a reasonable expectation) that the digital asset will maintain a stable value relative to the value of a fixed amount of monetary value.

The definition excludes digital assets that are a national currency, a deposit (including deposits tokenized on a distributed ledger) or a security (and the GENIUS Act separately clarifies that payment stablecoins are not securities).

The GENIUS Act defines “digital asset” as any digital representation of value that is recorded on a cryptographically secured distributed ledger and defines a “distributed ledger” as technology in which data is shared across a network that creates a public digital ledger of verified transactions or information among network participants, and cryptography is used to link the data to maintain the integrity of the public ledger and execute other functions. Private, permissioned digital ledgers appear to be largely outside the GENIUS Act’s scope.

Prohibition on Interest Payments

The GENIUS Act will prohibit permitted payment stablecoin issuers and foreign payment stablecoin issuers from paying payment stablecoin holders any form of interest or yield—whether in cash, tokens or other consideration—“solely in connection with the holding, use, or retention of such payment stablecoin.”

The interpretation of this restriction going forward will be a key area to watch given the significant interest among potential issuers in using rewards programs and other incentives as a differentiating factor to drive consumer demand. Among other things, the GENIUS Act does not expressly apply to affiliates of a stablecoin issuer, nor does it clarify when interest or a yield might be payable for reasons other than the holding, use or retention of a stablecoin.

Federal and State Standards for Stablecoin Issuers

The GENIUS Act mandates that regulators create federal standards for payment stablecoin issuers. Issuers subject to the federal regime will need to comply with reserve requirements, capital and liquidity requirements, standards for reserve asset diversification and risk management standards for interest rate, operational, compliance, IT and cybersecurity risks. State-qualified issuers will be subject to “substantially similar” requirements imposed by their home state.

Both federal- and state-qualified issuers will be deemed financial institutions for purposes of the Bank Secrecy Act and will be subject to all federal laws applicable to a financial institution in the United States related to economic sanctions, anti-money laundering and customer due diligence.

Issuers (but not their parents or affiliates) will also be subject to activity limits.

Treatment of Foreign Stablecoin Issuers

The GENIUS Act will not permit issuers located outside of the United States to be licensed as permitted payment stablecoin issuers or to issue stablecoins in the United States.

Digital asset service providers will further be prohibited from offering, selling or making available in the United States a payment stablecoin issued by a foreign stablecoin issuer unless the issuer is subject to a comparable non-U.S. regulatory regime (as determined by the Treasury Secretary) and other requirements.

Effective Dates and Rulemaking

The GENIUS Act will take effect on the earlier of (i) 18 months after its enactment or (ii) 120 days after the primary federal stablecoin regulators issue final regulations implementing the GENIUS Act. Upon effectiveness, the prohibition on unlicensed issuance of payment stablecoins will take effect, as will the prohibition on digital asset service providers dealing in stablecoins from foreign issuers, but the prohibition on dealing by digital asset service providers in payment stablecoins issued by unlicensed U.S. issuers will not take effect until three years after enactment.

The primary federal payment stablecoin regulators, the Treasury Secretary and each state payment stablecoin regulator are directed to promulgate implementing regulations through notice and comment procedures within one year of enactment of the GENIUS Act.

• The Expanding WKSI Eligibility Act, H.R. 4430, would allow more issuers to qualify for WKSI status and use shelf registration statements for securities offerings by reducing the public float requirement to qualify for WKSI status to $75 million from the current $700 million, as long as all other requirements for WKSI eligibility are met. WKSIs are eligible to use automatically effective shelf registration statements that allow for accelerated access to the capital markets.

• The Small Business Investor Capital Access Act, H.R. 3673, would amend the Investment Advisers Act of 1940 (“Advisers Act”) to require the SEC to annually adjust for inflation based on the Consumer Price Index the dollar threshold for the exemption from registration of investment advisers of private funds less than $150 million in assets under management.

• The Developing and Empowering our Aspiring Leaders Act, H.R. 4429, would require the SEC to expand the definition of a “qualifying investment” in the exemption from registration applicable to venture capital fund advisers under the Advisers Act to also include (1) an equity security issued by a qualifying portfolio company, whether acquired directly from the company or in a secondary acquisition and (2) an investment in another venture capital fund. In addition, the bill would require, as a condition of qualifying as a venture capital fund, that the qualifying investments of the private fund be predominately (1) acquired directly from a qualifying portfolio company or (2) in another venture capital fund.

• The Improving Capital Allocation for Newcomers Act, H.R. 4431, would allow for more investment firms to qualify as a venture capital fund and its related exemptions from certain regulations, by amending Section 3(c)(1) of the Investment Company Act of 1940 to increase the cap on aggregate capital contributions and uncalled capital commitments from $10 million to $150 million and increase the allowable number of beneficial owners from 250 to 2,000.

CARB’s FAQ addressed several topics, including which companies are in scope of the reporting requirements, the timelines to be included in the disclosures, and considerations related to certain definitions under the laws. Responding to prior public feedback, CARB indicated that initial climate-related financial risk reports submitted by January 1, 2026 may cover fiscal years ending in 2024 or 2025, depending on the company.

CARB also indicated that it is seeking further public input before finalizing the regulation, including on the definition of “doing business in California,” the calculation of revenue, the timing of GHG emissions reporting, and exemptions for certain circumstances.

Companies interested in providing input to CARB can submit feedback directly to CARB or through their respective trade associations. Further guidance from CARB is expected over the coming months.

Form PF Reporting Requirements. In 2023, the SEC created Section 5 of Form PF on which large hedge fund advisers (defined as registered investment advisers with at least $1.5 billion in regulatory assets under management (“RAUM”) attributable to hedge funds as of the end of any month in the prior fiscal quarter) to qualifying hedge funds—that is, hedge funds with a net asset value of at least $500 million—must report on certain current significant events, including “operations events.” An “operations event” is a “significant disruption or degradation of the reporting fund’s critical operations, whether as a result of an event at a service provider to the reporting fund, the reporting fund, or the adviser.”

“Critical operations” include operations necessary for either the investment, trading, valuation, reporting, and risk management of the reporting fund or the operation of the reporting fund in accordance with federal securities laws and regulations. The SEC in the Adopting Release observed that a “20 percent disruption of degradation of normal volume or capacity generally might be indicative of the types of stress for which reporting may be necessary.”

In the case of an operations event, large hedge fund advisers must report the event to the SEC as soon as reasonably practicable, but no later than 72 hours upon the occurrence of the event. Because the $1.5 billion in hedge fund RAUM trigger for becoming a “large hedge fund adviser” is retrospective, a registered adviser that does not currently meet that AUM threshold should closely monitor its month-end AUM attributable to hedge funds to ensure compliance with critical operations reporting obligations for any “qualifying hedge fund.”

When Could an AI Failure Trigger Reporting? It is clear that “operations events” can result from disruptions such as a cybersecurity attack or a power failure. But with firms increasingly reliant on AI for critical functions, there is also a significant risk that the unavailability of an AI model that is a key element of, for example, a trading platform or a core compliance system could trigger reporting on Form PF, even if the event occurs entirely at an AI service provider.

Practical Considerations for Asset Managers. With increased regulatory scrutiny of AI, asset managers should consider the potential operational impacts of a failure of AI solutions, either because the performance of a critical AI model becomes so unreliable as to render the model unusable, or because the model itself is not available. Accordingly, asset managers that are adopting AI for core functions should consider:

• Establishing Clear Reporting Thresholds and Escalation Pathways: Establish triggers and processes for escalating certain events to facilitate timely analysis of potential Form PF reporting obligations.

• Reviewing and Updating Business Continuity and/or Incident Response Plans: Consider updating such plans to address risks of critical AI disruptions.

• Enhancing Vendor Due Diligence: Consider whether processes for vendor due diligence should include an assessment of AI solutions used by any critical vendor, including ensuring contractual obligations on the vendor under which it must provide timely notification (e.g., no more than 24 hours) of an AI-related event that could trigger a Form PF reporting obligation for the firm.