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This podcast provides you the ability to listen to new regulatory guidance issued by the National Credit Union Administration, and occasionally the F D I C, the O C C, the F F I E C, or the C F P B. We will focus on new and material agency guidance, and historically important and still active guidance from past years that NCUA cites in examinations or conversations. This podcast is educational only and is not legal advice. We are sponsored by Credit Union Exam Solutions Incorporated. We also have another podcast called With Flying Colors where we provide tips for achieving success with the N C U A examination process and discuss hot topics that impact your credit union.
Samantha: Hello, this is Samantha Shares.
This episode covers GENIUS Act
Regulations on Payment Stablecoin
Issuance, Offer, and Sale.
The following is an audio
version of that document.
This podcast is educational
and is not legal advice.
We are sponsored by Credit Union
Exam Solutions Incorporated, whose
team has over two hundred and
forty years of National Credit
Union Administration experience.
We assist our clients with N C
U A so they save time and money.
If you are worried about a recent,
upcoming, or in process N C U A
examination, reach out to learn how they
can assist at Mark Treichel dot com.
Also check out our other podcast called
With Flying Colors where we provide tips
on how to achieve success with N C U A.
And now the document.
A quick note on format before we begin.
This proposed rule is long, and includes
eighty separate requests for comment.
Reading it word for word
would take about two hours.
So this episode covers the
material provisions in the
agency's own language, condensed.
The full text is available
at regulations dot gov.
Department of the Treasury.
Chapter fifteen of title twelve of
the Code of Federal Regulations.
GENIUS Act Regulations on Payment
Stablecoin Issuance, Offer, and Sale.
Agency: Department of the Treasury.
Action: Notice of proposed rulemaking.
Summary.
The Department of the Treasury, referred
to in this document as Treasury, proposes
to issue regulations to implement section
three of the Guiding and Establishing
National Innovation for U S Stablecoins
Act, known as the GENIUS Act, regarding
the statutory prohibitions and limitations
on payment stablecoin issuance,
offer, and sale in the United States.
Dates.
Comments must be received on
or before October nineteenth,
two thousand twenty six.
Background and Authority.
The GENIUS Act, enacted on July
eighteenth, two thousand twenty five,
establishes a comprehensive framework for
the regulation of payment stablecoins.
As defined in the Act, a payment
stablecoin is a digital asset that is,
or is designed to be, used as a means of
payment or settlement, and the issuer of
which is obligated to convert, redeem,
or repurchase for a fixed amount of
monetary value, and represents that
the issuer will maintain, or creates
the reasonable expectation that it
will maintain, a stable value relative
to a fixed amount of monetary value.
Section three of the Act delineates
the fundamental architecture of the
payment stablecoin market in the
United States, prescribing who may
issue, offer, sell, or otherwise
make available payment stablecoins.
Section three is intended to have
extraterritorial effect if conduct
involves the offer or sale of a
payment stablecoin to a person
located in the United States.
With respect to issuance, section
three, subsection a, makes it unlawful
for any person other than a permitted
payment stablecoin issuer to issue a
payment stablecoin in the United States.
Knowing participation in a violation
is punishable by a fine of not
more than one million dollars for
each violation, imprisonment for
not more than five years, or both.
Section three, subsection b, addresses the
offer, sale, or otherwise making available
of payment stablecoins in the United
States by digital asset service providers.
Under the Act, a digital asset service
provider is a person, such as a digital
asset exchange, that, for compensation
or profit, engages in the business
in the United States of exchanging
digital assets for monetary value or
for other digital assets, transferring
digital assets to a third party,
acting as a digital asset custodian,
or participating in financial services
relating to digital asset issuance.
Subsection b contains two
distinct prohibitions.
First, beginning on July eighteenth,
two thousand twenty eight, which
is three years after enactment, it
shall be unlawful for a digital asset
service provider to offer or sell
a payment stablecoin to a person
in the United States unless the
payment stablecoin is issued by a
permitted payment stablecoin issuer.
Second, and unlike the first, becoming
applicable on the effective date of
the Act, it shall be unlawful for any
digital asset service provider to offer,
sell, or otherwise make available in
the United States a payment stablecoin
issued by a foreign payment stablecoin
issuer unless that foreign issuer has the
technological capability to comply, and
will comply, with the terms of any lawful
order and any reciprocal arrangement
pursuant to section eighteen of the Act.
Various provisions of the
Act create exemptions.
Section three, subsection h, expressly
exempts three categories of transactions,
which we cover later in this episode.
Section eighteen, subsection a, provides
that the prohibitions under section three
shall not apply to a foreign payment
stablecoin issuer if certain conditions
are met, including that the issuer is
subject to regulation and supervision
by a foreign regulator in a country the
Secretary of the Treasury determines has
a regime comparable to the one established
under the GENIUS Act, and that the issuer
is registered with the Office of the
Comptroller of the Currency, the O C C.
Section five, subsection f, authorizes
the primary Federal payment stablecoin
regulators to waive the requirements
of the Act for up to twelve months
for certain pending applicants, and
the Act separately vests Treasury with
authority to provide limited safe harbors.
Both are covered later in this episode.
The Act directs Treasury to issue
regulations to implement section three.
On September nineteenth, two thousand
twenty five, Treasury published an Advance
Notice of Proposed Rulemaking, and in
drafting this proposal Treasury carefully
considered the comments received.
Treasury's Approach to This Rulemaking.
Treasury focused on the text of the
GENIUS Act itself as the starting
point and did not start from any
pre-existing regulatory baseline.
Several commenters suggested
that the federal securities laws
should serve as a reference point.
However, the Act clearly distinguishes
among payment stablecoins, securities,
and commodities, expressly providing
that payment stablecoins are
not securities or commodities.
Unlike many existing financial
instruments designed for investment
and capital appreciation, payment
stablecoins are designed to be used as
a means of payment or settlement and
are expected to maintain a stable value.
Treasury believes the Act evinces a
clear intent for payment stablecoins
to serve as an effective means of
payment and settlement, including across
borders, and application of traditional
investment rules may frustrate that goal.
Overview of the Rule.
This proposal would add new part
fifteen twenty three to title twelve
of the Code of Federal Regulations.
Section point one sets out
scope and defines key terms.
Section point two implements
the prohibition on issuance.
Section point three implements
the prohibitions on offer,
sale, and making available by
digital asset service providers.
Section point four sets out
exemptions and safe harbors.
Section point five includes a
severability provision, and Appendix
A provides interpretations addressing
common or complex scenarios.
Scope, Applicability, and Definitions.
Part fifteen twenty three is issued
to implement section three of the
Act regarding statutory prohibitions
and limitations on issuing, offering,
selling, and otherwise making available
payment stablecoins in the United States.
Consistent with the Act, the part
is intended to have extraterritorial
effect if conduct involves the offer
or sale of a payment stablecoin to a
person located in the United States.
The terms digital asset, federal qualified
payment stablecoin issuer, foreign
payment stablecoin issuer, insured
depository institution, lawful order,
monetary value, offer, payment stablecoin,
permitted payment stablecoin issuer,
person, primary Federal payment stablecoin
regulator, State, and subsidiary would
be defined by cross-reference to the
corresponding statutory definitions in
the Act without further elaboration.
Treasury asks whether any of those
terms should be clarified, and asks
in particular whether the term payment
stablecoin should be read to include a
digital asset that the issuer is obligated
to redeem in other forms of value
that may be the functional equivalent
of national currencies or deposits.
Treasury specifically asks whether
a digital asset that is redeemable
only in credit union shares should be
considered a payment stablecoin within
the scope of section three, and whether
the ubiquitous convertibility of credit
union shares and bank deposits in the U S
financial system bears on that question.
Several other terms are defined
because the Act does not define
them or because Treasury determined
additional clarity is needed.
Digital asset service provider.
The term is defined by cross-reference
to the Act, with the additional
clarification that it includes a person
that, for compensation or profit,
engages in the business in the United
States of issuing payment stablecoins.
Treasury concluded that the better
reading of the Act is that issuers of
payment stablecoins can simultaneously
be digital asset service providers,
since core issuer activities such as
redemption necessarily involve exchanging
digital assets for monetary value.
A contrary reading could exempt persons
engaged in significant offer and
sale activities from the restrictions
of section three merely because
they are also engaged in issuance,
which would facilitate evasion.
Issue.
The term issue is not defined in the Act.
Treasury proposes to define issue to
mean, except as required by a lawful
order, the first transfer of a payment
stablecoin by the issuer, whether
directly or indirectly, including by
crediting an account, that results
or will result in a person other than
the issuer having the right to use
or transfer the payment stablecoin
or to have the payment stablecoin
converted, redeemed, or repurchased.
The definition has four elements.
First, it focuses on the
first transfer by the issuer.
A consequence is that a digital asset
minted but held in the issuer's treasury
would not be considered issued, because
it has not been transferred to a third
party, though direct minting to a
holder's wallet would be a first transfer.
Second, the transfer may be effected
directly or indirectly, which addresses
transfers through an agent or intermediary
such as an underwriter or distributor.
Third, transfer includes the
crediting of an account, which
addresses situations where rights
have transferred but the stablecoin
remains in the issuer's wallet because
the issuer also serves as custodian.
Fourth, the transfer must result or
will result in a person other than
the issuer having the right to use or
transfer the stablecoin or to have it
converted, redeemed, or repurchased.
The phrase will result makes
clear that issuance need not
result in an immediate right.
If an issuer imposes a lockout period,
for example a stablecoin that may not be
redeemed until six months after issuance,
the stablecoin is still considered
issued during the non-redemption period.
Treasury believes the contrary
interpretation is not compelled by
the Act and would facilitate evasion.
The definition also does not require
that the transferee be the person holding
the right to use, transfer, or redeem.
If the issuer transfers to a custodian
and it is the custodian's customer
who holds those rights, the payment
stablecoin has still been issued.
Finally, after a payment stablecoin
has been redeemed, repurchased, or
otherwise reacquired by the issuer,
the first subsequent transfer that
otherwise satisfies the definition
is a new issuance, whether or
not it is characterized as a
reissuance, and whether or not the
issuer burned the digital asset.
The exception for lawful orders makes
clear that issuers may reissue to
comply with an order requiring seizing,
freezing, burning, or preventing transfer.
Issuer.
The term issuer itself is
not defined in the Act.
Treasury proposes to define issuer
of a particular payment stablecoin
to mean a person who is obligated to
convert, redeem, or repurchase the
payment stablecoin for a fixed amount of
monetary value, and who represents that
the person will maintain, or creates
the reasonable expectation that the
person will maintain, a stable value.
Both elements derive from the statutory
definition of payment stablecoin.
This matters where creation and
distribution involve multiple parties,
such as white label arrangements.
Other persons who participate in an
issuance, for example by performing
the technical minting functions
or by providing branding, would
not be considered the issuer, but
may still be subject to criminal
penalties if they knowingly
participate in an unlawful issuance.
Located in the United States.
Section three refers to a person
located in the United States
but does not define the phrase.
Treasury proposes to define it
separately for individuals and entities.
With respect to an individual, it
means the individual is physically
present in the United States, unless
the individual is not a resident of
the United States and the individual's
physical presence is merely temporary.
Treasury considered treating all
individuals physically present in the
United States as located here, but
concluded that approach is not compelled
by the Act and could create significant
administrability concerns and punitive
results, using the example of a non U
S resident issued a payment stablecoin
by a foreign issuer while temporarily
on vacation in the United States.
Conversely, the definition excludes
U S residents who are not physically
present in the United States, such
as a resident temporarily abroad.
Treasury does not believe the
limitation was intended to capture
a foreign issuer who issues to a U S
resident traveling abroad on vacation.
With respect to a partnership, company,
corporation, association, trust, estate,
cooperative organization, or other
business entity, located in the United
States means the entity is organized or
incorporated under the laws of the United
States or a State, or has its principal
place of business in the United States.
This disjunctive definition comports with
traditional notions of corporate domicile.
Offer.
The term is defined by cross-reference
to the Act, with the clarification
that it includes making available for
purchase, sale, or exchange a payment
stablecoin that has not yet been issued.
Treasury believes the plain
meaning of offer includes presales.
United States.
The term is not defined in the GENIUS Act.
Treasury proposes to define it to mean
each of the several States, which the
Act defines to include the District
of Columbia and each territory, the
Indian lands as defined in the Indian
Gaming Regulatory Act, and the Insular
Possessions of the United States.
Payment Stablecoin Issuance.
Proposed section fifteen twenty three
point two implements the limitation
on issuance in the United States.
Paragraph a provides that, except in
accordance with the exemptions and safe
harbors, it shall be unlawful for any
person to issue a payment stablecoin in
the United States unless the person is a
permitted payment stablecoin issuer, or
a foreign payment stablecoin issuer that
meets the criteria set out in section
eighteen, subsection a, of the Act.
That second category is an
addition to the statutory text.
Treasury believes the best reading of the
Act as a whole is that qualifying foreign
issuers may issue in the United States.
Section eighteen, subsection a, provides
that the prohibitions under section
three shall not apply to a foreign issuer
meeting certain criteria, and section four
expressly states that certain companies
not domiciled in the United States may
not issue payment stablecoins without the
approval of the Stablecoin Certification
Review Committee, which would be in
direct tension with section three if
foreign issuers were outright prohibited.
Practically, a contrary reading
would require extra steps before
those stablecoins reach U S
markets, creating inefficiencies
and an uneven playing field.
Paragraph b provides that a person will
be considered to have issued a payment
stablecoin in the United States only
if, at the time of issuance, the person
is located in the United States, or the
person issues the payment stablecoin to
a person located in the United States.
Treasury determined that a standard
based on the location of the parties
is consistent with the text of the Act,
administrable, and simpler for market
participants to understand, especially in
light of the criminal penalties involved,
and believes the Act does not evidence any
intent to capture issuances where neither
party is located in the United States.
Paragraph c describes when a
person not located in the United
States will be deemed not to
issue a payment stablecoin here.
A person meeting these requirements
will be deemed not to have violated
the Act even if the person's activities
would otherwise constitute, for
example, the inadvertent issuance of
an unregistered payment stablecoin to
a person located in the United States.
Four conditions must be met.
First, the person must not be
located in the United States.
Second, the person must reasonably
believe that each person to whom
the payment stablecoin is issued is
not located in the United States.
This excludes situations where the issuer
knows, has reason to know, or should
know that the person is located here.
Third, the issuer must have adopted
and implemented policies, procedures,
and controls reasonably designed
to avoid issuing to any person
located in the United States.
Treasury emphasizes these must not
only be adopted on paper but actually
implemented, and cannot be said to be
reasonably designed if they are static.
Treasury expects issuers to review
and update them as the market matures,
technology evolves, and in response to
discovery of any inadvertent issuance.
Fourth, the issuer must not engage in
advertising or solicitation activities
that target, or could reasonably be
expected to have the effect of targeting,
any person located in the United States.
Paragraph d addresses
participation in a violation,
which carries criminal penalties.
Treasury proposes three specific
but non-exclusive examples.
First, where the person incurs
an obligation to a third party
to convert, redeem, or repurchase
a payment stablecoin, including
a secondary obligation on
behalf of the original issuer.
This captures the issuer itself
as well as those functioning
as a joint issuer or guarantor.
Second, where the person coordinates
with the issuer to facilitate key steps
in the issuance, such as soliciting
customers or minting the stablecoins.
In a white label arrangement, the
person providing branding may be
considered to facilitate key steps
even though it is not the issuer.
Third, where the person acts as
a market maker for newly issued
stablecoins, distributes them to
purchasers, or otherwise makes them
available for secondary market trading.
Treasury expects this would cover an
initial exchange listing shortly after
issuance, but generally does not intend
to cover persons who merely purchase
a smaller subset for their own use,
or secondary market trading without a
close temporal nexus to the issuance.
Payment Stablecoin Offer and Sale.
Proposed section fifteen twenty
three point three implements the
prohibitions on offers and sales
by digital asset service providers.
Treasury first considered the relationship
between the two statutory prohibitions.
Because the Act defines offer as to
make available for purchase, sale, or
exchange, Treasury does not believe
the terms offer, sell, and make
available are mutually exclusive,
and they may significantly overlap.
Treasury also believes that offering,
selling, or otherwise making available a
payment stablecoin in the United States
must at least include offering or selling
to a person located in the United States.
To reduce redundancy, the
proposal enumerates a single set
of activities that would violate
either prohibition, as applicable.
Paragraph a provides that beginning on
July eighteenth, two thousand twenty
eight, it shall be unlawful for a digital
asset service provider to offer or sell
a payment stablecoin to a person located
in the United States unless the payment
stablecoin is issued by a permitted
payment stablecoin issuer, or by a
foreign payment stablecoin issuer that
meets the criteria set out in section
eighteen, subsection a, of the Act.
Paragraph b provides that it shall be
unlawful for a digital asset service
provider to offer or sell to a person
located in the United States, or otherwise
offer, sell, or make available in the
United States, a payment stablecoin issued
by a foreign payment stablecoin issuer
unless that issuer has the technological
capability to comply with, and will
comply with, the terms of any lawful
order and any reciprocal arrangement
pursuant to section eighteen of the Act.
Treasury does not read section
eighteen as relieving qualifying
foreign issuers of these obligations.
Paragraph c clarifies a digital
asset service provider's
obligations on that point.
As a practical matter, a provider may
not be able to ascertain the full extent
of a foreign issuer's technological
capabilities without prohibitively
onerous inquiry, and can never know
with certainty whether the issuer will
comply at all times in the future.
A strict reading would foreclose
these offers and sales in all cases.
Instead, a provider may rely on
a representation by the foreign
issuer, subject to two constraints.
First, the provider may not rely on
the representation unless it conducts
reasonable due diligence regarding it.
What is reasonable may vary with
the facts and circumstances, but
in all cases Treasury expects the
diligence to include confirming that
no prohibition on secondary trading
under section eight of the Act is in
effect with respect to that issuer.
Treasury concluded the diligence must
go further than that confirmation alone,
because other evidence of noncompliance
may be readily available from public
or non-public sources, and the
provider should consider all reasonably
available sources of information.
Second, the provider may not rely
on the representation if, based on
that diligence or other information
reasonably available to it, the provider
knows, has reason to know, or should
know that the representation is false
or that the foreign issuer does not
have the technological capability
to comply, or will not comply.
Treasury intends this to include, in
addition to actual knowledge of falsity,
a situation where the provider is aware
of facts that would cause a reasonable
person to reach that conclusion.
Paragraph d enumerates non-exhaustive
examples of activities that constitute
the offer or sale of a payment stablecoin
to a person located in the United States.
Directly soliciting a person
located in the United States to
purchase the payment stablecoin.
Advertising the payment stablecoin
as available for purchase by persons
located in the United States.
Responding to an unsolicited inquiry
from a person located in the United
States by indicating willingness to sell.
Advising potential purchasers on how
to evade generally applicable location
detection or restriction mechanisms
that would otherwise detect or block
purchases by persons located in the United
States, such as I P address checkers.
And entering into a contract for
the sale of a payment stablecoin
with a person located in the United
States, regardless of the form of
consideration or the timing of delivery.
Paragraph e is the counterpart to the
deemed-not provision on the issuance side.
A digital asset service provider
will be deemed not to offer or sell
to a person located in the United
States if three conditions are met.
The provider reasonably believes the
person to whom the stablecoin is offered,
sold, or otherwise made available
is not located in the United States.
The provider has adopted and actually
implemented policies, procedures,
and controls reasonably designed to
avoid offering, selling, or making
available to any person located here,
reviewed and updated rather than static.
And the provider does not engage in
advertising or solicitation activities
that target, or could reasonably be
expected to have the effect of targeting,
any person located in the United States.
Alternative Approaches.
For both the issuance and the
offer and sale provisions, Treasury
is considering two alternatives.
Under the first alternative, an issuance,
offer, or sale to a person located in
the United States would be unlawful
regardless of whether the issuer or
provider knew or should have known that
the recipient was actually located here.
That would involve narrowing or removing
the deemed-not provisions, and would
provide a clear line depending only
on factually verifiable locations.
Treasury acknowledges this may be
viewed as overly strict, and notes that
due diligence and reasonable belief
would instead go to whether a person
knowingly participated, a required
element for the criminal penalties.
Under the second alternative, Treasury
would align more directly with the
territorial concepts in Regulation S
under the Securities Act by adopting a
broader offshore transaction framework.
Located in the United States would
not be defined based on residency
or jurisdiction of organization.
Instead, a person would be deemed
not to issue, offer, or sell here
if the transaction is an offshore
transaction and no directed selling
efforts are made in the United States.
Directed selling efforts could include
advertising or solicitation directed at
the United States, liquidity incentives
directed at U S use, merchant enablement
activity, United States facing wallet
or platform integrations, or other
ecosystem development activity intended
to facilitate use or circulation here,
even if the formal issuance occurs abroad.
Treasury notes that closer alignment
with Regulation S may provide more
clarity for institutions already
familiar with that framework, though
more complexity for those who are not.
Exemptions and Safe Harbors.
Proposed section fifteen twenty
three point four implements three
sets of exemptions and safe harbors.
First, the prohibitions would not apply
to a subsidiary of an insured depository
institution, or a person applying to be
a Federal qualified payment stablecoin
issuer, with a pending application to
become a permitted payment stablecoin
issuer on the effective date of the
Act, but only if a waiver is granted by
the primary Federal payment stablecoin
regulator, and only to the extent that
waiver by its terms waives section three.
Treasury emphasizes that such
waivers are intended to be
temporary and limited in scope.
Second, the prohibitions would not apply
to the extent Treasury determines that
unusual and exigent circumstances exist.
Treasury reads the statute as authorizing
safe harbors in those circumstances
other than by rulemaking, and generally
expects to provide them by order, since
a notice and comment requirement would
frustrate the ability to respond rapidly.
Third, the prohibitions would not
apply to the three categories of
exempt transactions in the Act.
Direct transfers of digital assets
between two individuals acting on their
own behalf and for their own lawful
purposes, without an intermediary.
Transactions involving the receipt of
digital assets by an individual between
an account owned by the individual
in the United States and an account
owned by the individual abroad that
are offered by the same parent company.
And transactions by means of
a software or hardware wallet
that facilitates an individual's
own custody of digital assets.
Treasury also asks whether it should
issue additional regulatory safe harbors
at this time, including whether any
such safe harbor should be time based,
or limited by transaction size, such as
one million dollars per year, or limited
to particular industries or use cases.
Severability.
Proposed section fifteen twenty three
point five provides that the provisions
of the part are separate and severable.
If any provision is stayed or
determined to be invalid, it is
Treasury's intention that the remaining
provisions shall continue in effect.
In particular, the issuance
restrictions and the offer and
sale restrictions would generally
operate independently of one another.
Interpretations.
Treasury proposes four
interpretations in Appendix A
illustrating how the rule applies.
The first considers a U S resident issued
a payment stablecoin while on vacation
abroad, and concludes the foreign
issuer has not violated the issuance
limitation because neither party was
located in the United States at the time.
The second considers the airdropping
of a new payment stablecoin absent
any sale to a U S resident physically
present in the United States, and
concludes a payment stablecoin has
been issued in the United States.
The third considers an exchange that
coordinates with an issuer to list
a newly issued payment stablecoin,
and concludes the exchange is not the
issuer because it has no redemption
obligation, though depending on the
facts it may have participated in the
issuance and may be offering or selling.
The fourth considers a digital asset
not redeemable until a future date,
and concludes it has been issued even
though the redemption obligation does
not mature until after the transfer.
Requests for Comment.
Throughout the proposal, Treasury
poses eighty numbered questions.
They focus on whether the definitions
of issue, issuer, located in the United
States, and digital asset service
provider are clear and appropriately
scoped, what controls should support
a reasonable belief that an acquiring
person is outside the United States, what
due diligence a digital asset service
provider should perform before relying
on a foreign issuer's representation,
whether the examples of participation and
of offer and sale should be exhaustive,
and whether Treasury should instead
adopt one of the two alternatives.
Comments are due on or before
October nineteenth, two thousand
twenty six, at regulations dot gov.
This concludes the document.
If your credit union could use assistance
with your exam, reach out to Mark Treichel
on LinkedIn or at Mark Treichel dot com.
This is Samantha Shares, and
we thank you for listening.