GENIUS Act Loophole Puts Unregulated Coins at Risk of US Circulation
The GENIUS Act was designed to regulate payment stablecoins, but it may inadvertently open a back door for unregulated synthetic coins. The law aims to exclude synthetic coins like Sky's USDS and Ethena's USDe that are not backed by cash or Treasuries.
The distinction between permitted and excluded coins hinges on the definition of redemption. Payment stablecoin issuers must be obligated to redeem their coins for a fixed amount of monetary value, excluding digital assets denominated in a fixed amount of monetary value. In other words, redemption has to be for money, not another stablecoin.
USDS works by allowing holders to redeem only into USDC, which means it's not considered a payment stablecoin and its issuer doesn't need regulation under the GENIUS Act. This raises questions about whether this loophole could let unregulated foreign coins circulate in the US market.