Web3 Leaders See GENIUS Act Stifling Startups

President Donald Trump signed the GENIUS Act into law on July 18, ushering in the most comprehensive U.S. framework for stablecoins to date. While some in crypto view it as long-overdue clarity, others worry it may entrench incumbents and freeze out startups.

First the good news. Regulations are needed to make sure stablecoins are trustworthy, safe, and easy to understand for issuers who operate in a global market.

Arthur Breitman, Cofounder of Tezos (XTZ), said the one of the best things about the GENIUS Act is that it lays out a clear set of rules for U.S.-based dollar-linked stablecoin issuers. “And it also marks a sharp turning point with the U.S. administration embracing innovation rather than fighting it,” Breitman said.

He predicts the GENIUS act means we will likely see many more stablecoin issuers, “in particular from traditional finance.”

According to the law, traditional banks like Bank of America, for instance, must establish separate entities if they want to issue stablecoins. Also, the GENIUS Act does not protect your stablecoins, which are a digital currency, even if you got them at a BofA branch. The GENIUS Act establishes strict marketing standards for stablecoins, meaning no one can market them as being covered by FDIC insurance. 

No Slam Dunk for Big Tech 

The same applies for Big Tech companies like Meta Platforms (META), which had once dabbled in the stablecoin space.  Like any traditional bank, tech companies wanting to issue stablecoins to create online market places must obtain clearance from a Treasury-led oversight committee with veto authority.

“I think its great how it keeps the Web2 giants from muscling their way into stablecoins,” said Shady El Damaty, CEO at the Holonym Foundation, the driving force behind Human.Tech – a cryptography-first identity and personhood platform that differentiates real people from artificial intelligence. “It would be a disaster for consumers and for competition if Apple or Meta issued their own stablecoin,” he said, alluding to the fact that their size would immediately absorb market share from the start up foundations that have been at this for years, and developed this market in the first place.

The first stablecoin was BitUSD.  It was launched in July 2014 by the BitShares blockchain platform. BitUSD was backed by the native token of BitShares at the time and created through smart contracts that locked cash collateral at a ratio of 1:1.

U.S. Dollar Coin (USDC)and Tether (USDT) are the biggest stablecoins in use today. USDC was created by Circle Internet Financial (CRCL) in Boston around 2018. 

Tether Limited created USDT in July 2014. The company was co-founded by Brock Pierce, Reeve Collins, and Craig Sellars. Giancarlo Devasini, CFO of Bitfinex, later emerged as the central figure and major shareholder of Tether. He is still a major player at Tether.

Regulation Means More Costs, Possibly Tying Up Newcomers

El Damaty said that the new depth of regulation could “freeze” innovation with stablecoins, making easier for “companies already big enough to cross that new regulatory moat.”

The Senate Banking Committee highlighted these regulatory requirements for stablecoins in their fact sheet:

• Diversification requirements for reserve assets.
• Interest rate risk management standards.
• Capital, liquidity, and risk management requirements.
• Prohibiting riskier reserve assets like corporate debt or equities.

The main challenge for issuers will be grappling with rules on capital allocation, said Andrei Grachev, Managing Partner of Falcon Finance. Falcon is part of DWF Labs, a crypto market‑maker, venture investment firm, and token advisory founded in 2022 in Abu Dhabi. DWF launched a collateralized, yield‑bearing stablecoin protocol managed by Falcon (USDf) in April.

“Imagine building a stablecoin protocol only to face retroactive scrutiny based on shifting political winds,” Grachev said. “Without a unified vision, challenges include fragmented compliance requirements that raise operational costs, deter cross-border collaboration, and stifle innovation in areas like on-chain lending. Investors might pull back from U.S.-centric projects, favoring jurisdictions with clearer paths, while businesses risk talent flight to less hostile environments,” he said.

Trump noted that the GENIUS Act means stablecoin issuers active in the U.S. must be able to seize, freeze, or burn stablecoins “when legally required” and “must comply with lawful orders to do so.”

This is raising some eyebrows. What if a user is on the wrong end of the law, or, as Grachev said, not adhering to the prevailing political behaviors preferred by Washington at the time. The market might like Trump now. But he is only president for three more years. What if the next president has a different interpretation of the law?

“This will be akin to the hesitation we’ve seen pre-GENIUS Act, where lack of clarity stalled pilots despite surging demand, ultimately hindering the industry’s ability to move fast and build cool stuff.”

The concern among the stablecoin market participants seems to be that regulators will also expect stablecoin issuers to be able to comply quickly with full auditing and verify reserves, delivered in near-real time, to maintain compliance. Non compliance threatens their chance to sell their stablecoin in the U.S.

Nate Holiday, CEO at Makeinfinite, formerly known as Space and Time Labs, thinks the auditing issue is a solvable problem.

“You can’t do it using traditional auditing processes, but it’s something that can be achieved very simply with Proof of SQL,” he said. SQL for the non-tech investor stands for Structured Query Language. SQL is the standard programming language used to communicate with relational databases. Proof of SQL is Makeinfinite’s wheelhouse.

“Proof of SQL uses zero-knowledge proofs to ensure that stablecoins can only be minted (created) when the issuer has sufficient reserves on hand in accordance with the rules laid out in the GENIUS Act,” he said.  “You can do this in seconds and without disclosing sensitive financial data. You can run a stablecoin business without getting bogged down in audits,” he said.

Earlier this month, Ripple (XRP) CEO Brad Garlinghouse said the stablecoin sector is poised for explosive growth. They launched the Ripple stablecoin (USDr) this year. He said on CNBC’s Squawk Box that the market could grow from its current $250 billion capitalization to “as much as $2 trillion in a handful of years. We are very regulated. We have over 60 global licenses to participate in these markets. We feel the growth (in stablecoins) will serve us well as we continue to serve our institutional clients.”

When Garlinghouse says Ripple has 60 licenses worldwide to offer their stablecoin, he’s referring primarily to money transmitter licenses, virtual asset service provider registrations, and other local equivalents. These licenses cost money in numerous ways, including paying for local, legal expertise. 

The GENIUS Act may provide the clarity the crypto industry long sought—but clarity comes at a cost. As Ripple and other well-capitalized issuers scale up under a new regulatory regime, smaller startups may find the bar for participation higher than ever.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.