Paxos and Mastercard discuss stablecoins and the GENIUS Act | PaymentsSource

With the GENIUS Act now law, payment companies that issue or support stablecoins are hoping the rules will be clear, freeing them to start working with stablecoins.

The law allows federally insured depository institutions to issue stablecoins under federal regulatory oversight. Fintechs can also issue stablecoins with Federal Reserve approval.

Friday’s GENIUS Act signing ceremony was a victory for stablecoin issuers, who for years have pushed for U.S.-led rules that would provide legal cover for bank stablecoins. While bank stablecoins are a potential rival to fintech stablecoins, the nonbank issuers hope standards for consumer protections and the reserves that back stablecoins will draw more users to the market, and thus more revenue sources. 

“You can now have confidence that a dollar is a dollar,” Paxos co-founder and CEO Charles Cascarilla said at a Mastercard media event Monday. “You can create stablecoin adoption that is much more mainstream.”

Paxos’ plans

Paxos, which provides blockchain and tokenization technology, recently launched its dollar-backed stablecoin, USDG, across the European Union. The firm contends the GENIUS Act should assure users that stablecoins, which are designed to mitigate cryptocurrency volatility via a 1:1 backing by a traditional currency, are as safe as traditional currencies. 

“Stablecoins have been living in this ‘no man’s land’ for awhile,” Jorn Lambert, Mastercard’s chief product officer, said during a media event on Monday. “For anything to make it to the mainstream, you need to have regulatory structure.” 

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Paxos leads the Global Dollar Network, a stablecoin network that has more than two dozen fintechs that have banded together to build the scale necessary for stablecoins to support payments on a wide level. Mastercard recently joined the Global Dollar Network. PayPal and Fiserv partner with Paxos as part of their stablecoins. 

Stablecoins are not widely used for payments in developed economies, and most likely will not be used that way. That means issuers have to find other uses for stablecions beyond an investment asset. 

“If you go to the grocery store, the payment works very well,” Cascarilla said. “Nobody is clamoring for that to be changed. Where the system is not meeting the needs is the rails. Stablecoins will change the payment system. It’s a matter of how and when.”

Cascarilla contends stablecoins can be used to improve payment processing. Ripple, for example, has long used the XRP token to speed international transactions, opening that market to a wider range of users by making more frequent, smaller payments accessible without the time and expense that correspondent banks require. 

The GENIUS Act will enable more banks to directly access this type of strategy and other ways to improve transactions involving underserved markets — or nations with unstable traditional currency, Cascarilla said.

The adoption path for stablecoins is similar to other innovations, like mobile payments, Lambert said. Mobile payments were introduced in the early 2010s, but lacked a clear set of uses, according to Lambert. (It took several years for Apple Pay’s adoption to take off, for example. The expansion of e-commerce and eventually the Covid-19 pandemic catalyzed a mainstream mobile payment market.)

Digital assets such as stablecoins can address complex payment needs for gig or creator economy workers, such as the lack of centralized payroll or a scattered workforce. Workers can be paid with stablecoins, store those coins in a digital wallet and then convert to traditional currency at the point of sale.

“In bringing scale and reach and the trust of the banks, we can demonstrate to customers that we have their backs if something goes wrong,” Lambert said. 

What other issuers have to say

Tether, the largest stablecoin issuer, expects “every single financial institution and payment company” to issue a stablecoin due to the GENIUS Act, Tether CEO Paolo Ardoino said in an earlier interview with American Banker, adding that Tether would rely on cross-border payments to differentiate itself from banks that issue stablecoins.

In a statement following Friday’s GENIUS Act signing, Ardoino, who attended the signing, said “The U.S. now has the opportunity to reassert its leadership in digital finance by supporting open networks and programmable money. Stablecoins have become essential infrastructure in global markets, powering dollar access, enhancing cross-border settlements, and strengthening financial resilience.”

Circle, the world’s second largest stablecoin issuer, plans to apply for a national trust bank charter. This follows Circle’s IPO and comes as dozens of banks, retailers like Walmart and Amazon, and other firms plot stablecoins, potentially creating fierce competition or a glut of options. 

A national trust bank charter allows companies to offer custodial services under the regulatory scope of the OCC instead of a patchwork of state money transmitter licenses. The custodial service would additionally include representation of stocks and bonds on a blockchain network. This would enable Circle to offer more stablecoin-related services to its clients. 

In a statement on the GENIUS Act’s signing, Circle said “this isn’t a pivot; it’s a confirmation of how we do business. USDC has operated from day one with transparency and financial integrity at its core.”

The GENIUS Act requires all approved stablecoin issuers to have robust anti-money-laundering, or AML, programs including effective know-your-customer, or KYC, procedures to verify customer identities, including risks associated with customers, and a monitoring program, Jill DeWitt, senior director of compliance and third-party risk management solutions at Moody’s, said in an email. 

“This critical risk management will help protect the integrity of the growing digital assets market,” DeWitt said, noting the law also requires Fincen to issue additional guidance and rulemaking regarding novel and innovative methods and techniques for detecting illicit activity involving digital assets as well as standards for stablecoin issuers to monitor for, identify and report on illicit activity. 

“Those that already have robust KYC risk management and regulatory change management programs or are working towards implementing these program elements may have a competitive advantage,” DeWitt said. In a research note, KeyBanc Capital Markets noted the number of banks that discussed stablecoin plans during last week’s earnings calls, including Bank of America, Citigroup and JPMorganChase.

“All three banks indicated continued exploration of deposit tokens and/or stablecoins, but by our interpretation, Citi management seemed most excited about what tokenized dollars could do for banking/payments. Citi and JPMorgan commentary might suggest greater willingness to lean into stablecoins in the near term, while Bank of America’s commentary seemed slightly more conservative,” KeyBanc wrote. “As we’ve stated before, the true all-in cost of stablecoin payments will be revealed as services are commercialized. With the GENIUS Act across the finish line, we’d expect to see banks move a bit quicker on the topic.”

Some groups have expressed concerns about the GENIUS Act’s potential risk for smaller banks and consumers. The American Bankers Association said stablecoins have the potential to disintermediate core commercial bank activities, and could pose a significant risk to the fundamental role banks play in credit intermediation. 

Consumers increasingly encounter stablecoins in apps, wallets and digital platforms, and they deserve clear rules and real protections, said Chuck Bell, advocacy program director at Consumer Reports, in a release. “The Genius Act does not provide the safeguards that consumers reasonably expect when they use products that function like digital cash.”