"Reserved" Part 2

Q: How does GENIUS allow stablecoin holders to access reserves?

A: Through a first priority security interest.

In “Reserved, Part 1,” I addressed the question, “If an issuer defaults, what rights do stablecoin holders have to reserves?” Today, I address a new question: “How does GENIUS allow stablecoin holders to access reserves?”

The GENIUS Act attempts to fix the issue that holders do not have direct access to the issuer’s assets (“reserves”), and make stablecoins act more like cash during an insolvency, and partially succeeds. While there is still more work to be done to address insolvency issues, GENIUS adds a new section on insolvency.(1) So how do the new provisions work?

Stablecoin reserves must be held at eligible custodians.(2) Eligible custodians may themselves hold stablecoin reserves or may place them at appropriate third parties (banks, broker-dealers, or other custodians). If an issuer defaults, it will likely be placed into Chapter 11 bankruptcy, and stablecoin holders will have a claim against it for the amount of stablecoins they hold.(3) If a third party holding reserves defaults, it will be placed in bankruptcy, and the issuer will have a claim against it for the amount of stablecoin reserves it holds.

Pre-GENIUS, the problem was that stablecoin holders had no direct claim against the entities holding the stablecoin reserves, nor any specific rights to those reserves themselves. The GENIUS Act added a few provisions to address this issue. 

First, GENIUS adopted a new section of the Bankruptcy Code, 11 U.S.C. Section 507(e). This provision says (emphasis added),

‘‘(e) Notwithstanding subsection (a), if a payment stablecoin holder is not able to redeem all outstanding payment stablecoin claims from required payment stablecoin reserves maintained by the permitted payment stablecoin issuer, any such remaining claim arising from a person’s holding of a payment stablecoin issued by the permitted payment stablecoin issuer shall be a claim against the estate and shall have first priority over any other claim, including over any expenses and claims that have priority under that subsection, to the extent compliance with section 4 of the GENIUS Act would have required additional reserves to be maintained by the permitted payment stablecoin issuer for payment stablecoin holders.’’

Section 10(c)(3) of the GENIUS Act also added a further section 12 U.S.C. Section 5909(c)(3), which says (emphasis added),

“the claim of a person holding payment stablecoins issued by the permitted payment stablecoin issuer shall have priority, on a ratable basis with the claims of other persons holding such payment stablecoins, over the claims of the permitted payment stablecoin issuer and any other holder of claims against the permitted payment stablecoin issuer, with respect to required payment stablecoin reserves;”

These two provisions strengthen the link between stablecoin holder and stablecoin reserves. The first says that if a stablecoin issuer is placed into Chapter 11 bankruptcy, stablecoin holders will be first in line to recover.(4) Holders move up the recovery waterfall significantly, which is a huge step toward ensuring that they will recover 100 percent of what they are owed. 

The second provision aims directly to solve the lack of privity between stablecoin holders and third parties holding stablecoin reserves. If a third party is placed into Chapter 11 bankruptcy, holders now have a priority claim against the third party and recover before any claims by the stablecoin issuer (which may have claims against the third party for nonperformance, fees or interest owed, or other matters).

Given the competing interests in bankruptcy of debtors, creditors, and third parties, these related priorities are extremely helpful to stablecoin holders and should help answer questions about whether the cash nature of stablecoins will disappear in an insolvency.

GENIUS added other provisions, and additional issues are yet to be addressed. I will discuss those in part 3.

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(1) The GENIUS Act, Section 11(g), 12 U.S.C. 5910 (2026)

(2) The GENIUS Act, Section 10, 12 U.S.C. 5909.

(3) Some issuers could be subject to other insolvency regimes such as the Federal Deposit Insurance Act or applicable State insolvency laws. I will discuss these in future articles.

(4) It is unclear how this provision will interact with the FHLB’s super priority or the rights of the FDIC.