GENIUS Act: Mortgage Banking Ambush

QUESTION 

In your recent article, Cryptocurrency: Risks to Mortgage Banking, you said that you received many inquiries about the GENIUS Act. I was one of those who requested your view. You shared that you would respond to our questions soon. I am writing you again to urge you to offer an article on the GENIUS Act. 

I am a former federal regulator. I read the whole Act. It bothers me that the Act does not adequately protect consumers. And, I am concerned that it adds an element of instability to our banking system. Also, I do not think the mortgage market can be stable if it comes to depend on digital assets. 

So, I am asking you not to wait. I think the GENIUS Act is ambushing the banking sector. We need to know your view of the GENIUS Act since you are an expert in mortgage compliance. Please consider the following questions. 

In layperson's terms, what is the GENIUS Act? 

What are some of the general features of the Act? 

How does the GENIUS Act affect mortgage loans? 

SOLUTION 

CMS Tune-up

RESPONSE 

We received a huge response to the article we published on August 7^th. The article, Cryptocurrency: Risks to Mortgage Banking, sought to answer these two posed questions: 

·       Should cryptocurrency be accepted in lieu of dollars for a down payment on mortgage loans? 

·       How has the Trump Administration supported cryptocurrency? 

Apropos of your being a former federal regulator, in my summary, I wrote:

 

The regulatory uncertainty is extremely concerning. The regulatory environment for crypto-backed mortgages is still evolving and lacks uniformity across jurisdictions. A sudden shift in regulations or government policy regarding digital assets could significantly impact how these loans are structured, taxed, or regulated. 

I'm sure you understand the implications. 

I will provide a brief outline of the GENIUS Act (the acronym of Guiding and Establishing National Innovation for US Stablecoins Act), which was signed into law on July 18, 2025. The hype about it is that it represents the first comprehensive federal legislation in the United States addressing the regulation of stablecoins. 

By the way, I wish Congress would stop naming bills and acts in acronyms. It's really kind of silly. Supposedly, it is done for mnemonic reasons, but I see it more as branding, salesmanship, and maybe practical convenience. While acronyms may be helpful, they can also be misleading. Some acronyms are created to sound good, like the GENIUS Act, even if they don't accurately reflect the content of the bill. I wonder if there's a whole department in Congress set up to devise acronyms for legislation. But let's move on! 

KEY ASPECTS OF THE GENIUS ACT 

Purpose 

Ostensibly, the GENIUS Act is being promoted to foster innovation, maintain the dollar's global standing, and combat illicit activity. 

The Act has the preliminary makings of a potential regulatory framework that provides some clarity to encourage innovation and adoption in the stablecoins industry. But details matter, which I'll get to shortly. 

As to maintaining the US dollar's global standing, if you read my article on cryptocurrency's risk to mortgage banking (cited above), you probably already know my view of this aspiration. By requiring stablecoin reserves to be backed with US dollars and Treasuries, the Act seeks to strengthen the dollar's role as the global reserve currency. However, among other things, the government does not back cryptocurrency accounts and holdings in online wallets. They are not insured by the government like US bank deposits. It is prone to scams, thefts, and cyber hacks. And, there are no organizations that protect against crypto losses. I'm not convinced that the Act overcomes these challenges sufficiently to protect the consumer.

With respect to combating illicit activity, the Act enhances the US's ability to combat illegal activity involving stablecoins through regulation, registration of issuers, and coordination with the Treasury Department. 

The Act's framework reads like a lobbyist's wish list. It probably reflects dozens of lobbyists who descended on Congress to ensure minimal scrutiny in return for shifting risk to the general public. I will bet that many members of Congress could not describe what cryptocurrency is or how to actually regulate it. 

FIVE ELEMENTS OF THE GENIUS ACT

I believe there are five primary elements of the GENIUS Act. The following constitutes those five components. I make no claim that my outline is comprehensive. 

(1) Defines and Regulates Stablecoins 

The Act defines "payment stablecoins" as digital assets intended for payment or settlement that maintain a stable value relative to a fixed monetary value and are redeemable for that value. The concept of stable value relative to fixed monetary value is problematic. 

While stablecoins are supposedly designed to maintain a stable value "relative" to a fixed monetary value, such as a national currency like the US dollar, note the squirrely word "relative." Although designed for stability, stablecoins are not immune to volatility and have experienced temporary or, in some cases, permanent depegging events, a situation where it is "pegged to" or "depegged from" the value of a specific asset, most commonly a fiat currency like the US dollar. 

Different types of stablecoins have different risks. For instance, the algorithmic stablecoins do not rely on reserves and have proven particularly vulnerable to market volatility. An algorithmic stablecoin uses "smart contracts" – that is, digital agreements executed on a blockchain – and mathematical algorithms to automatically adjust its supply and demand in response to market conditions, thereby maintaining a stable value pegged to fiat currency. 

And, as to oversight, the regulatory landscape for stablecoins is still developing. Robust regulations and clear legal frameworks would need to be developed for the long-term stability of the stablecoin market.

 

Different Stablecoins, Varying Risks

 

As mentioned above, different types of stablecoins have different risks. Amongst the more active, listed alphabetically, are:

 

·       Commodity-backed stablecoins: Include Tether Gold and PAX Gold, pegged to physical gold.

·       Dai: A decentralized stablecoin pegged to the US Dollar, backed by a pool of cryptocurrencies.

·       Ethena USDe: A decentralized, synthetic stablecoin on Ethereum using a cash-and-carry strategy.

·       Euro-pegged stablecoins: Include EURC (issued by Circle) and EURS (developed by STASIS).

·       First Digital USD: A fiat-backed stablecoin launched in June 2023.

·       Frax: Uses a fractional-algorithmic mechanism.

·       Gemini Dollar (GUSD): An ERC-20 token on Ethereum, regulated by the New York State Department of Financial Services.

·       Pax Dollar: A stablecoin regulated by the New York State Department of Financial Services.

·       PayPal USD: A fiat-backed stablecoin backed by US Dollar deposits and short-term US Treasuries.

·       Tether: The largest stablecoin by market capitalization, pegged to the US Dollar, with variants for other fiat currencies and gold.

·       TrueUSD: A fully collateralized, fiat-backed stablecoin verified by the Ethereum network.

·       USD Coin: A major fiat-backed stablecoin pegged to the US Dollar.

·       USD1: Pegged to the US dollar and backed by short-term US government treasuries, dollar deposits, and other cash equivalents. NOTE: It is the fourth digital currency marketed by President Trump and his business partners. The company has also sold another cryptocurrency called "WLFI," with a business entity linked to Mr. Trump receiving a 75% cut of the sales. WLFI is an acronym of World Liberty Financial, which Mr. Trump and his family actively manage. This has raised concerns among critics about potential conflicts of interest, as Mr. Trump is obviously in a position to influence the cryptocurrency market through his policies and statements.

·       USDD: An algorithmic stablecoin associated with the TRON DAO. "DAO" stands for a Decentralized Autonomous Organization, which operates through rules encoded as computer programs (that is, smart contracts) on a blockchain.

(2) Issuer Requirements 

The Act requires that only authorized entities, such as subsidiaries of insured depository institutions or qualified federal and state entities, can issue the stablecoins in the US. Issuers must maintain 100% reserves in cash, US Treasury securities, or similar high-quality liquid assets, and provide monthly public disclosures and audits. 

(3) National Security Focus 

The Act mandates that stablecoin issuers comply with lawful orders, including the technical ability to freeze and burn wallets, and adhere to Bank Secrecy Act requirements for anti-money laundering and sanctions compliance. 

(4) Consumer Protection 

Measures include establishing reserve requirements, strict marketing rules, and prioritizing stablecoin holders in the event of an issuer's insolvency. This all sounds good, but there are significant shortcomings with respect to consumer protection. To put it bluntly, the protection is insufficient. The Act may not provide the same level of consumer protection as traditional banking, lacking features like deposit insurance or clear dispute resolution processes. There are no guarantees of timely redemption; specifically, while redemption policies are supposed to be disclosed, the Act doesn't guarantee that consumers can redeem stablecoins within a defined timeframe. 

Additionally, the Act does not offer federal insurance or a federal backstop for consumers who experience losses due to platform failure or hacks. From the standpoint of regulatory monitoring, there is limited audit transparency because of reliance on self-reported attestations for reserve security, which is seen by some as insufficient compared to independent audits. The self-reporting facet is unacceptable as a form of transparency with respect to a regulatory compliance audit. All this seems like an invitation to litigation. 

The Act could facilitate the entry of large technology companies into the stablecoins market with potentially less regulation than traditional banks, raising concerns about data privacy and market concentration. This reduction of regulation compared to the regulatory requirements of conventional banks could be a backdoor for tech companies to enter the banking sector. Indeed, it presents a potential for conflicts of interest, particularly regarding the involvement of prominent figures in the crypto industry and the possibility of "Big Tech" entering banking through stablecoin issuance. 

(5) Regulatory Framework and Oversight 

Regulatory authority is divided among various agencies, including the OCC for stand-alone issuers and the Federal Reserve, FDIC, and NCUA for institutions they already oversee that issue stablecoins. State-qualified issuers may be state-regulated if their state regime is "substantially similar" to the federal framework. 

And what of the oversight? The Act places significant oversight power with the Office of the Comptroller of the Currency (OCC), which I would argue may be too industry-friendly and may not involve other relevant agencies like the CFPB or FTC. 

Potential for Adverse Impact and Potential Risks 

With respect to mortgage loans, there are positive aspects of the GENIUS Act. However, I believe the negatives outweigh the positives. Let me explain. 

Positives 

The positives would be potentially faster and cheaper transactions by reducing closing times for real estate transactions, particularly for cross-border funding and purchases. I can envision that the Act enhances tokenized real estate transactions and fractional ownership by enabling the tokenization of property rights, potentially leading to increased liquidity and fractional ownership for commercial real estate assets. 

With tokenization, there is a process of representing ownership or other rights related to a real estate asset as a digital token on a blockchain. And, creating digital tokens could correspond to fractions of ownership in a property or a portfolio of properties. Thus, there is a potential for increased liquidity, lower barriers to entry for investors, and streamlined transactions. 

I suppose acceptance of stablecoins and other cryptocurrencies would be another positive effect of the GENIUS Act because stablecoins would possibly gain legitimacy under the new framework, where lenders (including GSEs like Fannie Mae and Freddie Mac) may increasingly accept crypto holdings as qualifying assets for mortgages, potentially without requiring conversion to US dollars. 

But, in my opinion, the negatives outweigh the positives. I can think of at least the following negative impacts and potential risks: disintermediation, impact on mortgage rates, insufficient consumer protections, increased risk of regulatory arbitrage, and the incentivizing of unregulated cryptocurrency. 

Negatives 

Disintermediation 

Disintermediation of bank activity and lending is inherent in the GENIUS framework. Disintermediation happens when there is a removal of intermediaries in a transaction or supply chain. In the world of banking, disintermediation refers to the process by which individuals and businesses bypass traditional financial institutions, such as banks, and engage in financial transactions directly. 

The banks are the "middleman," the intermediary. Savers deposit money in banks, and banks lend that money to borrowers. In disintermediation, the bank is cut out as the middleman. The framework of the GENIUS Act could incentivize holding value in stablecoins rather than bank deposits, potentially reducing the capital available for banks to make loans, including mortgages. 

Impact on Mortgage Rates and Credit Availability 

A significant shift in deposits from traditional banks to stablecoins could negatively impact mortgage rates and credit availability by reducing lending capacity, increasing funding costs, and having an adverse impact on household financial stability, caused by making credit more expensive and harder to obtain. This is the view of the American Bankers Association, and I concur. 

Furthermore, there is some notion that stablecoin issuers may be required to hold reserves in traditional financial institutions is quite a spin. Although such a scheme could, to some extent, return funds to the banking system, it would only be possible in the form of uninsured wholesale deposits. And, to be sure, nothing really stops banks from issuing their own stablecoins.  

Insufficient Consumer Protections 

Consumer Reports has been critical of the insufficient consumer protection in the GENIUS Act. In fact, many consumer groups have raised concerns that the GENIUS Act lacks sufficient consumer protections compared to traditional banking regulations. 

Increased Risk of Regulatory Arbitrage 

The Act introduces a new category, called "Federal qualified nonbank payment stablecoin issuers." This category opens up the potential to allow certain firms to operate under lighter regulatory oversight than traditional banks, potentially undermining the stability of the financial system. 

The regulatory arbitrage aspect can happen where the practice of structuring business activities takes advantage of differences or gaps in regulations or laws across different jurisdictions or even within the same regulatory framework. In other words, such arbitrage could gain a competitive advantage or reduce compliance costs by operating in environments with more favorable regulations. 

Incentivizing Unregulated Crypto Exposure 

I think a legitimate concern is that the Act could inadvertently incentivize unregulated crypto exposure within the housing market, potentially leading to increased systemic instability. 

Summary 

As the Chairman of the first and only full-service, mortgage risk management firm in the United States, specializing exclusively in residential mortgage compliance, my orientation is toward how to reduce the legal and regulatory compliance risk of our clients. Our mission is to ensure our clients have the support needed to comply with all mandatory federal and state banking laws, rules, Acts, regulations, and best practices. Thus, my compliance orientation influences the scrutiny of the GENIUS Act.

The GENIUS Act may represent a significant step towards regulating the stablecoins market and incorporating consumer protection measures, though it falls far short of reducing risk to the consumer and, by extension, to mortgage lenders and servicers. The effectiveness of these measures and the potential for unintended consequences depend on implementation and enforcement, and an ongoing debate exists regarding the balance between fostering innovation and ensuring adequate consumer safeguards within this evolving financial landscape. 

Supervision and enforcement at this time seem to be somewhat diminished by the current Administration. It's important to remember that the GENIUS Act is a relatively new piece of legislation, and its long-term effectiveness will depend on ongoing regulatory oversight, enforcement, and potential future amendments. I have considerable concerns about the adverse effects that entrenching stablecoins will have on the stability of the US banking system.

Whether the GENIUS Act can be trusted with supervision and enforcement will depend on the effectiveness of its implementation, ongoing vigilance by regulators and stakeholders, and future adjustments to address the challenges, some of which I have enunciated. 

Jonathan Foxx, PhD, MBA
Chairman & Managing Director
Lenders Compliance Group