A little short of GENIUS: did Congress adequately protect stablecoin holders from issuer insolvency?

by Michele Alt, Roman Goldstein, and Patrick Haggerty

To protect stablecoin holders from issuer insolvency, GENIUS:

• Requires an issuer to hold full and segregated reserves against all its outstanding stablecoins;

  
  

• Provides holders of stablecoins issued by a nonbank issuer a superpriority claim in bankruptcy on those reserves and the issuer’s other assets; and

  
  

• Prescribes a non-bankruptcy resolution process for any insolvent bank issuer.

  
  

Congress, however, overlooked a few important issues when developing this framework. This paper identifies these issues and proposes straightforward solutions to address them.

Stablecoin holders can still lose their money despite the GENIUS 1:1 reserve requirement.

In theory, the 1:1 reserve requirement protects stablecoin holders, but there’s a big gap between theory and practice. As regulators in the UK found out the hard way, customers have adequate protection only if the reserves are there when the issuer fails.

UK Experience. UK payments and e-money firms must segregate any funds they receive in connection with making a payment or in exchange for e-money issued.(1) These requirements, similar to the GENIUS reserve and segregation requirements, are designed to ensure that consumers receive their funds promptly in the event of a firm’s failure. But, in recent years, the UK Financial Conduct Authority has found an average shortfall of 65% in funds owed to clients at firms that became insolvent.(2)  

How did that happen? The FCA discovered that internal control at new payment firms is often lacking.(3) And, like the GENIUS framework, the UK regime relies on audit as an internal control against improper segregation. But audits are detective, not preventive, controls. By the time an auditor detects improper segregation, the reserves will too often be long gone. 

Stablecoin holders could still lose their money despite their GENIUS superpriority in bankruptcy if a nonbank issuer’s reserves are insufficient. 

GENIUS superpriority protects stablecoin holders only if the bankrupt issuer has assets in addition to the reserves that are sufficient to satisfy the stablecoin holders’ claims. And even then, other claimants may have superior claims over these assets, bankruptcy proceedings are likely to be slow, and the superpriority may deter necessary experts from participating.

Other claimants may still have first dibs. GENIUS’s superpriority may not be enough to protect stablecoin holders in bankruptcy because the Bankruptcy Code arguably subordinates their claims to repo and swap counterparties(4), debtor-in-possession financiers(5), and secured creditors.(6)

Stablecoin holders will probably have to wait a long time for their money. Although GENIUS directs the bankruptcy court to use “best efforts” to distribute reserves to stablecoin holders within 14 days(7), there is no guarantee holders will see their money that quickly. Bankruptcy is a long, painful experience for the customers of financial firms, as we have recently seen in the cases of Synapse, Voyager, Celsius, and FTX, in which claimants have waited months or years for their money.(8) 

The necessary experts may be unwilling to help. A stablecoin issuer’s insolvency could be complicated, requiring the support of lawyers, accountants, and other experts. GENIUS superpriority for stablecoin holders may make it hard to recruit these experts.  Unless the estate has assets in excess of the reserves, there will be no assets to pay the bankruptcy experts after the stablecoin holders are paid. 

Stablecoin holders could also lose their money if a bank issuer goes into receivership. 

It’s unclear how the GENIUS receivership process will work. It is likely, however, that stablecoin holders would only be fully protected if the insolvent bank issuer has assets in addition to the reserves that are sufficient to satisfy the stablecoin holders’ claims.

Uninsured bank receivership processes are untested.

In general, banks cannot go through bankruptcy.(9) Consistent with this general rule, GENIUS provides that a “depository institution…shall be resolved by the Federal Deposit Insurance Corporation…or State payment stablecoin regulator, as applicable.”(10) 

A “depository institution” in this context means an uninsured national bank, credit union, or state bank. Insured depository institutions can’t be stablecoin issuers under GENIUS(11). Although the FDIC has extensive experience in resolving insured banks, receiverships of uninsured banks are rare. The OCC is responsible under its current rules for appointing and overseeing the receivers of uninsured national banks(12), but, like many state banking regulators, the OCC last administered receiverships in the 1930s. 

Although it's unclear how any of the resolution agencies will resolve a stablecoin issuer that is a bank, the FDIC has the staff to administer a receivership and the institutional knowledge to do it efficiently, which should allow stablecoin holders to get paid more quickly than they would in a bankruptcy proceeding. State regulators generally have fewer resources and may have to rely on a state court to appoint a private receiver, which may be a protracted process.(13)

Receivership expenses may get paid first.

Whatever the process, federal bank receivership law requires that “[a]ll expenses of any receivership shall be paid out of the assets of such association before distribution of the proceeds thereof.”(14) Many states have similar laws.(15) After paying these expenses, the issuer’s assets may be less than $1 per outstanding stablecoin, leaving the stablecoin holders taking a haircut. 

How to strengthen GENIUS stablecoin holder protections.

Regulators have the ability to close the gaps in GENIUS by regulation. Specifically, they could: 

Require smart contracts and reserves on chain. With smart contracts, an issuer can reduce its business process to code, preventing deviations. By requiring stablecoin issuers to use public, open-source, immutable smart contracts, regulators could ensure the existence of effective, preventive controls against improper segregation. For example, the smart contract could codify dual control requirements, allowing reserves to be moved only when multiple authorized employees enter the transaction. The smart contract could also codify segregation of duties, requiring employees of different functions to approve the transaction. Smart contracts would enable the easy freezing of stablecoin redemptions in the event of insolvency, facilitating an orderly resolution or bankruptcy. Finally, public code allows market participants to assess the adequacy of these controls, enabling the public to supplement the regulators’ scarce supervisory resources.

Putting the reserves on chain—which GENIUS expressly allows(16)— would allow anyone with access to the blockchain to verify the amount and type of reserves at any time. Allowing this type of public auditing would dispel any unfounded suspicions that a particular issuer is insolvent or has insufficient liquid assets to honor redemptions. 

Require issuers to pre-fund insolvency expenses to ensure stablecoin holders get $1 for each stablecoin and the benefit of professionals necessary to liquidate an insolvent issuer. Regulators could require stablecoin issuers to pre-fund insolvency expenses, including administrator costs. The regulators could effect such requirements either by calibrating their capital and liquidity rules or by imposing conditions through the licensing process. 

Clarify the receivership process for bank stablecoin issuers. Under the OCC’s rules for resolving uninsured national banks under the National Bank Act, the OCC appoints a receiver for the failed bank.(17) The OCC could amend these rules to provide that, in the case of an uninsured national bank stablecoin issuer, the OCC will appoint the FDIC as receiver. The FDIC could also update its resolution manual to describe how it would resolve a national bank issuer. State agencies could do the same.

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(1) The Payment Services Regulations 2017; and The Electronic Money Regulations 2011.

(2)  FCA, Consultation Paper CP24/20***, Changes to the safeguarding regime for payments and e-money firms, § 1.3.

(3)  FCA Payment Services and Electronic Money – Our Approach §§ 10.70 to 10.88.

(4) 11 USC 559, 560.

(5) 11 USC 364(c).

(6) 11 USC 725.

(7) 11 USC 362(d)(5) (added by GENIUS § 11(c)(2)(C)).

(8) UK insolvency proceedings for e-money issuers (analogous to stablecoin issuers) have also taken years. E.g., In re Ipagoo LLP [2022] EWCA Civ 302; In re Allied Wallet Ltd., [2022] EWHC 1877 (Ch); UK Finance, Response to HM Treasury Review: Payment and Electronic Money Institution Insolvency Regulations § 4.1 (May 29, 2025).

(9) 11 USC 109(b)(2).

(10) 12 USC 5911(1).

(11) GENIUS, moreover, explicitly provides that stablecoins are not “subject to deposit insurance by the Federal Deposit Insurance Corporation.” 12 USC 5903(e)(1).

(12) 12 CFR 51.

(13) Teri WIlliams, Nevada Financial Institutions Division files court petition to place Prime Trust LLC in receivership (June 27, 2003). 

(14) 12 USC 196.

(15) E.g., NY Banking Law § 613.

(16) 12 USC 5903(a)(1)(A)(vii).

(17) 12 CFR 51.2.