Stablecoin Overview
Stablecoins are a form of cryptocurrency. Cryptocurrencies are a digital representation of value that relies on cryptography to secure transactions and functions similarly to most currencies by providing a medium of exchange, unit of account, and store of value. Most cryptocurrencies do not require intermediaries or government backing.
Stablecoins are a unique subset of cryptocurrency. Unlike Bitcoin and other similar cryptocurrencies, stablecoins attempt to maintain a fixed, or “pegged,” exchange rate, in which their value is fixed against the value of another currency or asset with the aim of maintaining stability in value. [Note: A memo titled “Stablecoin Overview” is available on the KLRD website and provides additional information on stablecoin pegging methods.]
Unlike other cryptocurrencies whose current usage is mainly as an investment vehicle, stablecoins tend to be focused on facilitating transactions between parties. Currently, there are two major use cases for stablecoins:
- International transfers: Stablecoin users do not need multiple bank accounts in two countries to transfer money from one country to another; they just need one cryptocurrency wallet that transfers their stablecoin to another user’s wallet; and
- Peer-to-peer digital transfers: Stablecoins allow users to complete digital transfers without the need for third parties to facilitate transactions.
Stablecoin Risks
While stablecoin usage continues to rise, there are risks to users and the financial sector, including:
- False claims that a stablecoin is fully backed by reserves;
- False claims that reserves are fully backed by a specific asset;
- Unauthorized use of consumer funds;
- Volatility in the reserve asset’s price;
- A digital “bank run” on algorithm-backed stablecoins;
- A run on the bank holding a stablecoin’s reserves;
- Inability to convert reserves into liquid assets to maintain the pegged exchange rate; and
- Use of stablecoins for illicit activities.
The GENIUS Act
In July 2025, the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act (Act) was signed into law, creating a framework to regulate stablecoins in the United States. [Note: Additional details about the Act can be found on the Congressional Research Service Website. (PDF)]
The Act defines a payment stablecoin as a digital asset issued for payment or settlement and redeemable at a predetermined fixed amount.
Issuers would be required to hold at least $1 of permitted reserves for every $1 of stablecoins issued. The Act limits permitted reserves to:
- Coins and currency;
- Insured deposits held at banks and credit unions;
- Short-dated U.S. Treasury bills;
- Repurchase agreements (repos) and reverse repos backed by U.S. Treasury bills;
- Government money market funds;
- Central bank reserves; and
- Any other similar government-issued asset approved by regulators.
The Act requires federal and state regulators to issue tailored capital, liquidity, and risk management rules for federal and state stablecoin issuers but exempts stablecoin issuers from the regulatory capital standards applied to traditional banks.
Some of the consumer protection requirements in the Act include, among other items:
- Using reserve assets for certain activities;
- Establishing and disclosing stablecoin redemption procedures;
- Issuing periodic reports of outstanding stablecoins and reserve composition certified by executives and examined by registered public accounting firms;
- Requiring certain issuers to submit audited annual financial statements;
- Prohibiting paying interest to stablecoin holders; and
- Subjecting issuers to the Bank Secrecy Act (BSA) and Anti-money Laundering (AML) rules.
Option for State Regulation
The Act creates a state regulatory option for non-bank issuers with fewer than $10.0 billion in outstanding stablecoins, provided the regulatory regime is “substantially similar” to the federal regime as determined by the Stablecoin Certification Review Committee.
The Act would allow such issuers to opt in to a state regulatory regime and operate nationally. A non-bank that grows above the $10.0 billion threshold is required to transition to the federal regime unless granted a federal waiver.
State regulators would have supervisory, examination, and enforcement authority over all state issuers. The Act allows state regulators to cede these authorities to the Federal Reserve. The Act also allows the Federal Reserve or the Comptroller’s Office to take enforcement actions against state issuers in unusual circumstances.
State Stablecoin Issuance
In August 2025, Wyoming introduced a state-backed stablecoin. The stablecoin will use cash and short-term U.S. treasury bills as the reserve asset, and Wyoming is assessing whether it will use the interest generated on those reserve assets to help fund Wyoming schools.
Wyoming states the stablecoin is not a Central Bank Digital Currency (CBDC) since it is backed by cash and U.S. treasury bills and is also not subject to certain provisions of the GENIUS Act since it is a state-backed stablecoin and not one created by a corporation. At this time, it is unclear how courts may decide on those two issues.
State Stablecoin Regulation
California, Nebraska, and Texas enacted stablecoin legislation in the last few years. California’s rule-making authority will have regulations effective on July 1, 2026, and is currently in the rule-making process.
Nebraska and Texas updated their controllable electronic record and money definitions, respectively, to include records or money backed by a reserve asset. [Note: the “Stablecoin Overview” memo on the KLRD website contains details and legislative citations for all three states.]
New York
Recent commentary noted the federal rule-making process resulting from the GENIUS Act will study New York’s stablecoin regulatory framework to help guide its decision-making.
New York has been regulating cryptocurrencies since 2015. In 2022, the New York’s Department of Financial Services (Department) issued guidance indicating it would apply certain requirements to stablecoins backed by the U.S. dollar and issued under the Department’s authorization. These stablecoin-specific regulations did not replace any other regulations related to the issuer or Department.
Key regulations from the guidance include the following:
- A stablecoin must be fully backed by a reserve of assets (1:1 backing) as of the end of each business day;
- Stablecoin reserves must be held with a U.S. state or federally chartered depository institution insured by the Federal Deposit Insurance Corporation (FDIC) or with pre-approved custodians;
- Stablecoin reserves can only be:
- U.S. treasury bills with maturity dates of three months or fewer;
- Reverse purchase agreements fully collateralized by U.S. treasury bills, notes, or bonds; or
- Other Department-approved assets;
- Reserves must be subject to an examination at least once per month by an independent certified public accountant licensed in the United States who attests to certain reporting requirements; and
- Stablecoin issuers must adopt clear redemption policies approved in advance by the Department allowing the user to redeem the stablecoin from the issuer at a 1:1 exchange rate for the U.S. dollar net of any fees.
By Mike Ditch and Leighann Thone
See Financial Institutions and Insurance for more.