The GENIUS Act: A New Regulatory Framework for Stablecoins and Its Impact on Private Fund Managers

On July 18, 2025, President Donald Trump signed into law the Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act) See Act Here, establishing the first comprehensive federal regulatory framework for payment stablecoins in the United States. This landmark legislation creates clear rules for the issuance and operation of stablecoins, digital assets designed to maintain stable value relative to fiat currencies.

Key Provisions of the GENIUS Act

Definition and Scope

The GENIUS Act defines a “payment stablecoin” as a digital asset that:

• Is designed to be used as a means of payment or settlement
• Can be redeemed for a fixed amount of monetary value
• Maintains or is represented to maintain stable value relative to a fixed amount of monetary value

Notably excluded from this definition are national currencies, bank deposits (including those recorded using distributed ledger technology), and securities as defined under existing federal securities laws.

Permitted Issuers Only

The Act establishes that only “permitted payment stablecoin issuers” may legally issue stablecoins in the United States. These permitted issuers include:

• Subsidiaries of insured depository institutions approved to issue payment stablecoins
• Federal qualified payment stablecoin issuers (approved by the Office of the Comptroller of the Currency)
• State qualified payment stablecoin issuers (approved by state regulators for issuances up to $10 billion)

Reserve Requirements

The Act mandates strict reserve requirements for stablecoin issuers:

• Reserves must back outstanding stablecoins on at least a 1:1 basis
• Permitted reserve assets include:
  • U.S. coins and currency
  • Demand deposits at insured depository institutions
  • Treasury bills, notes, or bonds with maturity of 93 days or less
  • Overnight repurchase agreements backed by short-term Treasury securities
  • Registered government money market funds
• Reserves cannot be rehypothecated except for specific permitted purposes

Operational Requirements

Stablecoin issuers must:

• Publicly disclose redemption policies and fees
• Publish monthly reports on reserve composition
• Submit to monthly examinations by registered public accounting firms
• Maintain appropriate capital, liquidity, and risk management standards
• Comply with Bank Secrecy Act and anti-money laundering requirements
• Have technological capability to comply with lawful orders to freeze or block transactions

Prohibition on Interest

The Act explicitly prohibits stablecoin issuers from paying any form of interest or yield to stablecoin holders solely for holding the stablecoins.

Limitations on Non-Financial Companies

Public companies not predominantly engaged in financial activities face additional restrictions and must obtain unanimous approval from the Stablecoin Certification Review Committee, demonstrating they will not pose material risks to financial stability and will comply with strict data use limitations.

Impact on Private Fund Managers

While the GENIUS Act does not directly regulate private fund managers, it creates several important considerations for funds operating in the digital asset space:

1. Investment Opportunities and Restrictions

Private funds investing in digital assets must now carefully distinguish between permitted and non-permitted stablecoins. After the three-year transition period, digital asset service providers will be prohibited from offering non-compliant stablecoins, potentially affecting liquidity and trading strategies for funds holding these assets.

2. Due Diligence Requirements

Fund managers must enhance their due diligence processes to:

• Verify that stablecoins in their portfolios are issued by permitted issuers
• Assess the financial stability and regulatory compliance of stablecoin issuers
• Monitor monthly reserve reports and audit findings

3. Operational Considerations

For funds that:

• Use stablecoins for cash management: Only permitted stablecoins will qualify as cash equivalents for accounting purposes
• Engage in DeFi activities: Must ensure counterparty stablecoins comply with the Act
• Provide liquidity or market-making services: May see opportunities in facilitating the transition to compliant stablecoins

4. Potential New Investment Strategies

The Act may create opportunities for private funds to:

• Invest in newly regulated stablecoin issuers as they establish operations
• Provide capital or services to entities seeking to become permitted issuers
• Develop strategies around the $10 billion threshold for state vs. federal oversight

5. Compliance and Risk Management

Fund managers should:

• Update investment policies to reflect the new regulatory landscape
• Implement systems to track stablecoin issuer compliance status
• Consider the impact on portfolio valuations if non-compliant stablecoins lose market access
• Review custodial arrangements to ensure proper handling of permitted stablecoins

6. International Considerations

The Act’s provisions regarding foreign stablecoin issuers may affect funds with international operations or those investing in global digital asset markets. Foreign issuers must demonstrate technological capability to comply with U.S. lawful orders, potentially limiting the universe of acceptable stablecoins for U.S.-based funds.

Timing and Regulatory Implementation

The GENIUS Act establishes a phased implementation timeline with several critical deadlines:

Immediate Effective Dates

• Prohibition on new stablecoin issuance by non-permitted entities: Effective immediately upon enactment (July 18, 2025)
• Existing issuer grace period: Certain existing issuers may continue operations for up to 12 months while their applications are pending

Transition Rules for Size Thresholds

State-qualified issuers that exceed $10 billion in outstanding issuance have 360 days to either:

• Transition to federal regulatory oversight, or
• Cease issuing new stablecoins until below the threshold

Regulatory Rulemaking Process

Multiple agencies must issue implementing regulations:

• Treasury Department: General implementation rules, AML/BSA requirements, and principles for state regime evaluation
• Federal Banking Agencies: Capital, liquidity, and risk management standards tailored to stablecoin issuers
• State Regulators: Must establish or update their regulatory frameworks to meet federal standards

Next Steps for Market Participants

For Potential Stablecoin Issuers:

1. Determine preferred regulatory path (federal vs. state for eligible entities)
2. Prepare comprehensive applications meeting all statutory requirements
3. Establish compliant reserve management and reporting systems
4. Implement required technological capabilities for transaction blocking

For Digital Asset Service Providers:

1. Begin identifying and categorizing current stablecoin offerings
2. Establish vendor due diligence processes for stablecoin issuers
3. Plan for potential disruption to non-compliant stablecoin liquidity
4. Update systems to distinguish between permitted and non-permitted stablecoins before the three-year deadline

For Private Fund Managers:

1. Inventory current stablecoin exposures across all portfolios
2. Develop policies for the three-year transition period
3. Consider opportunities in the evolving regulatory landscape
4. Prepare for enhanced due diligence requirements on stablecoin counterparties

Looking Ahead

The GENIUS Act represents a significant step toward regulatory clarity in the digital asset space. For private fund managers, it signals both the maturation of the stablecoin market and the need for enhanced operational and compliance infrastructure. While the Act primarily targets stablecoin issuers, its ripple effects will be felt throughout the digital asset ecosystem.

Fund managers should begin preparing now for the changes ahead, particularly given the three-year transition period for the prohibition on non-permitted stablecoins. This includes reviewing existing digital asset holdings, updating investment policies, and ensuring robust due diligence processes are in place for stablecoin-related investments.

The establishment of clear regulatory guardrails may ultimately benefit the industry by providing greater certainty and potentially attracting more institutional capital to the digital asset space. However, funds must remain vigilant in monitoring compliance and adapting their strategies to this new regulatory reality.

This blog post is for informational purposes only and does not constitute legal advice. Private fund managers should consult with qualified legal counsel to understand how the GENIUS Act may affect their specific circumstances.