I asked o3 pro about the Genius Act, and it gave me this answer (there is more at the link), consistent with other responses I have heard:
The statute’s policy goal is to keep a payment‑stablecoin issuer from morphing into a fractional‑reserve bank or a trading house while still giving it enough freedom to:
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hold the specified reserve assets and manage their maturities;
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use overnight Treasuries repo markets for cash management (explicitly allowed);
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provide custody of customers’ coins or private keys.
Everything else—consumer lending, merchant acquiring, market‑making, proprietary trading, staking, you name it—would require prior approval and would be subject to additional capital/liquidity rules.
Recall also that the stablecoins are by law prohibited from paying interest, though the backing assets, such as T-Bills, will pay interest to the stablecoin issuer. Thus when nominal interest rates are high, the issuer will earn a decent spread and have no problem covering costs. When nominal interest rates are low or zero, fees on stablecoin issuance might be required, otherwise there is no way to cover the basic costs of operation.
What will be the costs of intermediation? In the financial sector as a whole, they are arguably about two percent. For money market funds, however, they are closer to 0.2 percent. (Since these entities will be strictly regulated, we cannot estimate fees by looking at current major stablecoin issuers. Across some different inquiries, o3 pro gave me intermediation cost estimates ranging from 0.8 percent to 3 percent.) Whatever number will be the case here, the intermediaries may need to resort to fees if market interest rates are very low, in order to break even. That may in turn induce individuals to yank money out of the accounts — who wants to keep paying those fees?
Perhaps a more likely problem would stem from interest rates that are fairly high. In that case, why hold zero-yielding stablecoins? The sector will again contract, though in an orderly fashion.
Perhaps the sector and its intermediaries are most stable for some band of interest rates “in the middle”?
Inspections of the backing assets are supposed to take place every month, though the regulator can take a look any time. I am not sure what is the optimal frequency. But I worry there is sometimes no “efficiency wage profit margin” to induce responsible behavior. After all, the issuers have no other lines of business and no other sources of revenue. Non-pecuniary competition for deposits might reduce profits further (“come get your free toaster!”). Thus being kicked out of the sector is no major penalty (for those parameter values), which puts a significant burden on the possibility of legal and felony punishments. It can be hard to pull the trigger on those, however.
If interest rates are somewhat higher though, the desire to keep that profit will create an economic incentive for responsible behavior, above and beyond the fear of legal penalties.
As I understand the legislation, the level of interest rates seems important for sector stability and also for the size of the sector. That is because there are no interest payments on stablecoins that can adjust with the underlying rates on the T-Bills. Perhaps that feature of the legislation should be reconsidered? Or perhaps issuer competition across non-pecuniary yields on the accounts will serve a sufficiently comparable purpose?
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