Why in news?
In July 2025 the U.S. Congress passed, and President Donald Trump signed, the “Generating Essential National Investment in U.S. Stablecoins” (GENIUS) Act. The law creates America’s first federal framework for regulating stablecoins—digital currencies pegged to the U.S. dollar—renewing global interest in these instruments.
What are stablecoins?
- Stablecoins are cryptocurrencies designed to keep their value stable by linking themselves to a reference asset, typically a fiat currency such as the U.S. dollar.
- They are issued by private entities like Tether (USDT), Circle (USDC) and MakerDAO (DAI) and operate on blockchain networks.
- Under the GENIUS Act issuers must maintain 100% reserves, undergo monthly audits and prioritise consumer protection, bringing these instruments under federal oversight.
Key features
- Pegged value: Most stablecoins are backed by equivalent fiat reserves (e.g. USDC), crypto collateral (e.g. DAI), algorithms (e.g. the now‑defunct TerraUSD) or commodities like gold.
- Reserve mechanism: Depending on the type, reserves may be held in bank accounts, crypto vaults or smart contracts to maintain price stability.
- Blockchain‑enabled: Transactions occur in real time across borders without the need for intermediaries, making payments faster and cheaper.
- Smart contract compatibility: Stablecoins are widely used in decentralised finance (DeFi) for lending, trading and liquidity provision.
Significance
- Financial inclusion: They can provide digital payment tools to people without access to formal banking, especially in developing countries.
- Lower transaction costs: Cross‑border transfers using stablecoins can be faster and cheaper than traditional bank remittances.
- Hedge against volatility: Investors often use stablecoins as a digital “safe haven” during periods of cryptocurrency market instability.
Stablecoins versus Central Bank Digital Currencies (CBDCs)
- Issuer: Stablecoins are issued by private companies; CBDCs are issued by central banks.
- Backing: Stablecoins are backed by reserves or algorithms; CBDCs are fully backed by sovereign currency and are legal tender.
- Risk: Stablecoins carry counter‑party and reserve risks; CBDCs have lower risk because they are state‑issued.
- Use cases: Stablecoins are currently used mainly in the crypto ecosystem and for cross‑border payments, whereas CBDCs are intended for mainstream retail and wholesale transactions.
- Control and transparency: Stablecoin governance depends on the issuer’s policies; CBDCs are subject to government regulation and public scrutiny.
The GENIUS Act signals that governments are beginning to regulate private digital currencies. Understanding stablecoins is essential for grasping the future of money and finance.