While the GENIUS Act promised to bring order to America’s chaotic stablecoin landscape when it took effect July 18, 2025, banking executives are discovering that the devil—as usual in financial regulation—lurks in the definitional details.
The law’s most glaring oversight centers on its exclusion of “tokenized deposits”—a carve-out that fundamentally allows banks to issue digital dollar proxies without subjecting themselves to the Act’s stringent requirements. This legislative sleight-of-hand has created what critics describe as a regulatory arbitrage opportunity that could render the entire framework meaningless.
Critics warn this definitional loophole creates regulatory arbitrage that could undermine the entire GENIUS Act framework.
Under GENIUS, only “payment stablecoins” face the full regulatory gauntlet: mandatory 1:1 reserve backing with Treasury bills, monthly transparency reports, and rigorous audit requirements. Meanwhile, tokenized deposits—which perform virtually identical functions—operate in a regulatory twilight zone. The distinction appears almost comically semantic, given that both instruments facilitate digital payments and maintain dollar parity.
Banking insiders warn this loophole could trigger a massive exodus from regulated stablecoins toward these less-constrained alternatives. Why subject yourself to the Stablecoin Certification Review Committee’s unanimous approval requirements when you can simply rebrand your offering as a tokenized deposit?
The Act’s three-year grace period for foreign-issued stablecoins only compounds the problem, creating additional regulatory shopping opportunities.
The consumer protection provisions—prohibiting misleading marketing claims about federal backing and mandating clear redemption policies—apply solely to designated payment stablecoins. This creates the perverse incentive structure where the most regulated products bear the heaviest compliance burden while functionally similar alternatives operate with minimal oversight. The regulatory disparity becomes even more pronounced when considering that DeFi protocols operating in this space leverage smart contracts to automate financial services without traditional oversight mechanisms. The Act specifically prohibits issuers from using customer transaction data for targeted advertising without explicit consent. Meanwhile, nonbank entities seeking federal approval must navigate the cumbersome process of applying to the OCC for issuance authorization.
Perhaps most troubling is the potential for international regulatory arbitrage. The Act’s restriction limiting secondary market trading to approved U.S. issuers after three years could inadvertently push stablecoin activity offshore, undermining American financial leadership in digital assets.
The Treasury Department now faces an unenviable task: closing definitional loopholes without stifling innovation. The irony is palpable—legislation designed to prevent stablecoin market fragmentation may have inadvertently accelerated it.
Whether regulators can thread this needle before the 18-month implementation deadline remains the trillion-dollar question haunting American digital finance.
