TradFi vs. DeFi: Inside the GENIUS Act Battle

Traditional finance (TradFi) continues to debate with blockchain advocates on how to best implement the GENIUS Act. This game-changing legislation surrounding stablecoin issuance was designed to help provide regulatory clarity, improve consumer protections, and drive innovation in the digital asset sector.

Passed in July 2025, the Ley GENIUS represents the first U.S. law to regulate stablecoins, setting the stage for cooperation—and conflict—between Wall Street and Web3.

Here’s how the GENIUS Act is set to blur the line between traditional finance and the digital economy, and why some bankers feel it poses a risk to their livelihoods.

What the GENIUS Act Regulates: Stablecoins 101

The GENIUS Act focuses on stablecoins. These digital assets are unique in that their structure enables them to avoid market volatility. They accomplish this task through the use of several methods, including fiat reserves, algorithms, and digital asset reserves.

Stablecoins have become very popular over the last few years after projects like Tether (USDT) demonstrated that it was possible to keep them pegged to the value of the USD. Today, there are many stablecoin options, and their use has gotten to the point that lawmakers felt the need to clarify some regulations.

GENIUS Act: The New U.S. Stablecoin Rulebook

The GENIUS Act creates a regulatory checklist for the stablecoin market. These clear requirements include disclosures, reserve quotas, auditing requirements, and even who can issue these assets. Notably, the GENIUS Act is the first comprehensive stablecoin bill to pass into law. However, parties continue to debate on some key aspects of the bill. Here’s what you need to know.

Source – The Hudson Institute – Bill Hagerty

Who Can Issue Stablecoins Under the GENIUS Act?

One of the most important aspects of the GENIUS Act is that it sets out who can issue stablecoins to US residents.  It states that only those companies holding a  “Permitted Payment Stablecoin Issuers” (PPSIs) license will be granted this capability. Notably, these companies can be native or internationally based.

The GENIUS Act breaks the issuers down into several categories. The first type of issuer is FDIC-insured companies, followed by nonbank entities such as uninsured banks. However, this group must submit for approval from the Office of the Comptroller of the Currency (OCC).

State-approved stablecoin issuers are the final group listed in the document. This group will be capped at $10B in stablecoins before having to secure federal approval. Interestingly, they will only have 1 year to secure federal approval once they cross this threshold.
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1:1 Reserves & Eligible Assets (What’s Allowed)

The GENIUS Act lays out in plain text new reserve requirements for all stablecoin issuers. The first requirement is that the issuer keep 100% reserves in liquid assets available at all times. This reserve has to be a 1:1 peg to their issued tokens and can be held in USD or Short-term U.S. Treasury securities and Treasury-backed reverse repurchase agreements.
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These funds can only be stored at approved, insured, and regulated depository institutions. It also dictates that the funds must be stored in bankruptcy-remote accounts and be clearly separated from company funds. Lastly, the legislation prohibits the use of the reserve funding as collateral for loans.

Compliance: BSA/AML, Monthly Exams & Annual Audits

The GENIUS Act treats permitted issuers as financial institutions under the Bank Secrecy Act (customer identification, AML program, sanctions compliance). Issuers must publish the monthly composition of reserves and produce annual audited financial statements by a registered public accounting firm, filed with their primary Federal regulator.

Redemptions & Disclosures

Another core aspect of the legislation dictates that all stablecoin issuers must provide clear redemption policies for users. These requirements include disclosing any fees and are seen as an important consumer protection that will help prevent abuse moving forward.

Issuer Yield Ban: No Interest on Stablecoins

One of the key aspects of the GENIUS Act is that it dictates that issuers can’t pay dividends, interest, or yield on stablecoins. This requirement was designed to prevent these assets from being confused with securities or violating any potential SEC regulations.

Why the GENIUS Act’s Interest Ban Divides TradFi and DeFi

It’s this last requirement that has caused TradFi and blockchain advocates to face off. Both sides have put forth their arguments to the US Department of the Treasury, which has concluded an open forum with the public regarding the matter.

So far, the debate revolves around core aspects of the wording, including what exactly constitutes an interest payment. Blockchain companies argue that exchanges offering staking and other DeFi options should not be included in this interpretation, while bankers feel that it must be to prevent capital outflow. Here’s what both sides want.

What Crypto Companies Want

Specifically, Coinbase sent a letter to the Treasury explaining that the GENIUS Act does not state that the ban on interest payments includes non-issuers like exchanges. Their letter explains that DeFi options like staking are a core aspect of the decentralized economy and vital to innovation.

Coinbase, the largest CEX in the US, requested that the Treasury publicly state that non-financial software be excluded from the requirements. These systems include network validators and other non-issuers. The company also laid out some tax and accounting recommendations, including treating stablecoin payments as cash in terms of tax purposes.

Drive Innovation

The main proponents of this bill argue that services like staking, yield farming, and other reward-generating options are critical to the digital economy and part of what makes them so unique. Eliminating them from the equation only helps the bankers and slows innovation.

What Banks Want

TradFi has put up significant opposition towards the GENIUS Act, especially on the interest-bearing rewards aspects. The Bank Policy Institute (BPI) communicated to the Treasury that it sees any type of interest paid on stablecoins as a direct threat to its stability.

This group has been vocal on their desire to see all interest payments blocked in the past. Their main objective is that they feel that it gives stablecoin issuers an unfair advantage, which could lead to massive capital outflow from users who are tired of their fiat savings accounts not keeping up with inflation. Specifically, the banking group predicts $6.6 trillion in deposit outflows.

Protect Their Assets

Major banks and TradFi groups continue to express worry that they could see an outflow of capital and customers due to the effects of this bill. They argue that this outflow would endanger the markets and create instability among major institutions.

Banking Monopoly Not Happy

However, it must be noted that they never offer to pay their savings account holders more or match the rewards offered by DeFi options. As such, many view their opposition not towards the technology but simply towards competition in general.

GENIUS Act Sponsored by

The GENIUS Act comes after years of debate between lawmakers, crypto companies, and advocates. It was sponsored by Senator Bill Hagerty (R-TN), Senator Tim Scott (R-SC), Senator Cynthia Lummis (R-WY), and Senator Dan Sullivan (R-AK). Their goal was to finally provide a clear regulatory framework for stablecoin issuance and integration.

Timeline of the GENIUS Act

Senator Bill Hagerty introduced the bill on May 21, 2025. It was passed by the Senate on June 17, 2025, after winning a  68–30 bipartisan vote. From there, the House passed the legislation 308–122 during its Crypto Week discussions on July 17, 2025. The GENIUS Act was signed by President Trump on July 18, 2025, and is set to go into effect on January 18, 2027, or 120 days after regulatory implementation.

Who Opposes the GENIUS Act—and Why

There are still senators and representatives who continue to voice their opposition to this bill. Some of the leading opponents to the GENIUS Act include Senator Elizabeth Warren (D-MA) and Senator Josh Hawley (R-MO). They say that the bill gives too much control to the tech companies without offering much to the consumer.

Regulatory Climate Warming Up to Crypto Companies

This latest act is another sign that the crypto market is maturing. In the US, digital assets have gone mainstream, with the country now joining the digital economy in the form of Bitcoin reserves. Many note that these actions continue to drive adoption globally.

How the GENIUS Act Blurs the Line Between TradFi and DeFi

The GENIUS Act can be seen as a monumental milestone for the digital economy, but only if it’s implemented with the core purpose of driving innovation. However, you can expect to see TradFi continue to oppose DeFi options because they offer more to users. In the end, the best strategy is probably to integrate the two sectors, providing the most benefit to the average citizen.

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