Written in Washington, D.C. on May 26, 2025
In 25Q2, right around the time of several major crypto conferences, the Senate voted 66–32 to advance the GENIUS Act (Guiding and Establishing the National Innovation of U.S. Stablecoins) on the 19th. Within less than a week, financial and crypto institutions rushed to iterate and respond. As a friend put it, “the entire market suddenly became restless.”
The uniqueness of this bill lies in its potential to profoundly impact both the short-term and long-term dynamics of the global financial and economic system. Its effects will unfold in layered waves, from the surface to deeper levels — much like an earthquake occurring just beneath the ground. If successfully implemented, the GENIUS Act will skillfully neutralize the disruptive impact that crypto poses to the current financial role of the U.S. dollar and Treasury bonds, and in turn, channel the growth of crypto market value and liquidity back into support for the dollar. At its core, the Act aims to convert the U.S. dollar’s current advantage as a price anchor into a long-term value anchor. In this sense, the name “GENIUS” is truly well deserved.
Based on the discussions at last week’s conference in New York, the following related issues have been preliminarily summarized:
tl;dr
1.The fundamental reasons behind the weakening control of the U.S. dollar;
2.Strategic trade-offs and retreat-to-advance decisions in the face of crypto-driven disruption of the global monetary system;
3.The nominal versus substantive objectives of the GENIUS Act;
4.Insights from DeFi restaking for the fiat world and the monetary multiplier effect of shadow money;
5.Gold, the U.S. dollar, and crypto stablecoins;
6.Global market reactions and the dramatic transformation of financial transactions and assets following the enactment of the bill.
1.The fundamental reasons behind the weakening control of the U.S. dollar
The decline in the U.S. dollar’s influence and control over the global economy stems from a range of factors across multiple dimensions. From a long-cycle perspective, the resource dividends accumulated since the Age of Exploration and through World War II have largely been exhausted. From a short-cycle perspective, the effectiveness of economic policy interventions is steadily weakening. However, the core factors driving the current situation can be summarized in the following four key points:
i) The rapid rise of global economies and national power has reduced the necessity of using the U.S. dollar as the sole medium for global trade and financial settlement. An increasing number of countries and regions are building their own trade and currency settlement systems independent of the dollar.
ii) During the COVID-19 period (2020–2022), the U.S. expanded its money supply by more than 44%, with M2 increasing from $15.2 trillion to $21.9 trillion (Federal Reserve data). This led to an irreversible decline in the dollar’s credibility in the post-pandemic era.
iii) Within the U.S. system itself, the Federal Reserve’s monetary and fiscal policy tools have become rigid and entropy-prone. Capital efficiency and wealth distribution are highly asymmetric, making the system ill-suited to meet the growth demands of the new digital and AI-driven economic paradigm.
iv) The rapid rise of decentralized crypto monetary and financial systems, combined with the above macro conditions, is now disruptively overturning the Bretton Woods–based traditional financial order that was built on sovereign credit.
It is worth noting that many established financial figures, such as Ray Dalio, as well as certain politicians, have exhibited a kind of dogmatic inertia in their understanding of the Thucydides Trap under current conditions. Over the past decade, many have continued to believe that the Thucydides Trap remains or is about to emerge between the United States and China, even using it as the basis for lobbying efforts or investment strategies.
In reality, the U.S. and China are facing fundamentally similar challenges and should be viewed as being on the same side of the Thucydides Trap. The other side is represented by the crypto monetary-financial system and the decentralized protocol governance of the digital and cryptographic era. The real question is how to confront this inevitable structural transition — this is what an upgraded, paradigm-shift version of the Thucydides Trap in the new era should aim to resolve. Clearly, the GENIUS Act got the point this time.
2.Strategic trade-offs and retreat-to-advance decisions in the face of crypto-driven disruption of the global monetary system
Based on the above, the GENIUS Act is essentially a trade-off — a retreat in order to advance, a break-the-boat decision. It marks the Federal Reserve’s strategic recognition of the reality that the traditional U.S. dollar is losing influence and control within the legacy financial system. In response, it proactively delegates further authority over the issuance and settlement of dollar-denominated money. (Note: A large portion of offshore U.S. dollars already originates from credit expansion by offshore banks beyond the Federal Reserve’s balance sheet. These belong to the category of shadow money, with the authenticity of issuance and clearing governed by access frameworks and compliance networks, and ultimately backed and filtered by sovereign central banks.)
Facing the inevitable rise of crypto finance, the Act takes advantage of the trend. By learning from DeFi restaking mechanisms and drawing on the offshore U.S. dollar’s experience in off-balance-sheet expansion through overseas banking credit systems, the Act encourages regulated institutions to issue stablecoins — thus forming a new model of on-chain offshore structure, essentially a new type of on-chain shadow money. This further amplifies the monetary multiplier effect of dollar liquidity in circulation.
The following table outlines a comparison of the characteristics of different tiers and categories of U.S. dollars and various types of shadow U.S. dollar instruments:
This decision and initiative under the GENIUS Act will, to a large extent, effectively help the U.S. dollar achieve a “re-anchoring” effect. It not only has the potential to restore confidence among holders of U.S. Treasuries and dollar-denominated assets, but also enables off-balance-sheet dollars to rapidly expand by leveraging the growth of the crypto market — achieving both risk mitigation and strategic advantage in one move.
3.The nominal versus substantive objectives of the GENIUS Act
The nominal and substantive objectives of the GENIUS Act are clearly different. Simply put: domestically, it is framed as a compliance and regulatory initiative; externally, it serves as a demonstration and promotional effort. The Act provides a policy template for financial regulators in other countries and regions, while also offering an execution model — using the U.S. market as an example — for global financial institutions. The ultimate goal is to accelerate the adoption of dollar-backed stablecoins in the global crypto market.
In the short term, from a domestic perspective, the GENIUS Act clearly serves the direct purpose of regulatory oversight — ensuring stability during the transitional period as the rapidly growing crypto market challenges the traditional financial system. This aligns with the standard operating logic of the U.S. financial legal and regulatory framework. From a long-term international perspective, however, the Act has achieved a clear demonstration and signaling effect. It maximizes the inherent advantage of the U.S. dollar as a price anchor in the traditional financial system, while tactically addressing a key pain point in the crypto market — namely, the absence of any stable price anchor beyond the dollar.
By adopting a semi-compliant, semi-open approach — explicitly restricting foreign stablecoin issuers from operating in the U.S. market unless approved by U.S. regulators — the Act indirectly signals that such issuers may operate outside the U.S., thereby encouraging and reinforcing global dependence on and usage of U.S. dollar-backed stablecoins in the evolving crypto finance landscape.
On May 21, the Hong Kong Legislative Council passed the Stablecoin Regulation Bill. It is expected that Japan’s Financial Services Agency (FSA), Singapore’s Monetary Authority (MAS), and Dubai’s DFSA will soon issue corresponding policy responses.
Due to the uniquely critical role of stablecoins in the ecosystem — and the rapid iterative shifts triggered by the GENIUS Act — this development presents a significant challenge to jurisdictions with front-loaded regulatory approaches. Striking the right balance between flexibility and control is crucial: excessive looseness may lead to market disorder and enforcement difficulties, while overly tight restrictions risk being quickly outpaced by the crypto market and losing competitive advantage in the next phase of finance, payments, and asset management.
Furthermore, the quality of these regulatory frameworks will directly determine the degree to which local stablecoins are pegged to U.S. dollar stablecoins in the next stage. A peg that runs too deep may result in the rapid loss of monetary independence for those stablecoins in financial markets. (Note: Due to the global, highly liquid, and highly interactive nature of the crypto market, it may be even harder for stablecoins tied to non-USD fiat currencies to maintain independence. Pegs may become increasingly rigid.)
Meanwhile, jurisdictions that opt for delayed regulatory action will likely face no less difficulty. They risk falling into the same dilemma — market disorder from rapid paradigm shifts on one hand, and regulatory obsolescence and loss of competitiveness on the other.
4.Insights from DeFi restaking for the fiat world and the monetary multiplier effect of shadow money
A partner from the asset side told me last week that the next stage of global finance will present major challenges, and one will need dual literacy in both traditional finance and crypto to survive — otherwise, the market will eliminate you quickly. Indeed, over the past two cycles of DeFi development, the crypto market has independently evolved into a highly specialized, digitally protocolized economic science system. From protocol design, tokenomics, and financial analysis methodologies and tools, to increasingly complex business models, it has already far surpassed traditional finance in certain dimensions.
Although Crypto DeFi differs from traditional finance in many ways, it still requires constant calibration and benchmarking against the legacy financial system. The two are learning from each other, evolving rapidly, and progressively converging — together forming a new financial paradigm.
The introduction of the GENIUS Act bears a strong resemblance to DeFi practices such as staking, restaking, and LSD in previous market cycles — or rather, it represents another extension of the same underlying methodology into the fiat currency world.
For example, in DeFi: a user stakes ETH via Lido to receive rebase-enabled stETH, then uses stETH as collateral on AAVE to borrow USDC at 70% of its value, and uses the borrowed USDC to re-enter the market and purchase more ETH. Repeating this process forms a geometric progression loop with a ratio of q = 0.7. In the ideal case, this recursive cycle results in a monetary multiplier of approximately 3.3×.
The above process can soon be replicated under the GENIUS Act on the basis of fiat-backed stablecoins. For instance, a Japanese financial institution operating outside the U.S. could, under compliance conditions, issue USDJ by collateralizing U.S. Treasuries. It could then off-ramp the USDJ into JPY, convert back to USD via foreign exchange, and use the proceeds to purchase more U.S. Treasuries — thus forming a loop. In this repeated cycle, several multiplier assumptions are implicitly embedded in the process:
i) the collateralization ratio (which may be full, discounted, or overcollateralized);
ii) slippage and friction from on/off-ramp and FX conversion;
iii) market-driven leakage.
Taking all of these into account yields a geometric multiplier q per cycle, and ultimately a monetary multiplier of 1 / (1 — q). This resulting multiplier represents the ideal financial amplification factor that the GENIUS Act — and subsequent stablecoin regulations in other countries — could potentially achieve based on U.S. dollar and U.S. Treasury holdings.
Of course, this does not yet account for the over-issuance by unregulated entities, nor the subsequent restaking of tokenized assets derived from stablecoins once deployed into other asset classes — resulting in additional layers of shadow assets. The flexibility of stablecoins will far exceed that of traditional fiat-based derivatives markets, and this phenomenon of “nested-loop stablecoin asset structures” is bound to deliver an unprecedented shock to the legacy financial system.
5.Gold, the U.S. Dollar, and Crypto Stablecoins
In the earlier piece titled <The Dramatic Shift Following Trump’s Election Victory>, we discussed the generational shifts in the foundational anchors of the financial system — namely gold, the U.S. dollar, and Bitcoin. This represents a macro-level view of belief transitions across three eras of finance. From a micro-level perspective, however, each financial era also requires a settlement unit that people can hold in their hands on a daily basis. In the past, it was a gold ingot; later, a paper dollar bill. But in the future — what will it be?
As previously mentioned, one of the key pain points in the crypto market is that — apart from the U.S. dollar (via stablecoins) — there is no native crypto currency or asset that can serve as a reliable price anchor for stablecoins. The reason is simple: pricing matters. In real-world transactions, whether for a good or a service, people need a relatively stable numerical reference to make intuitive value judgments. It cannot be that a cup of Americano costs 0.000038 BTC yesterday and 0.000032 BTC today — such volatility deprives consumers and traders of the ability to assess value with confidence.
The most essential feature of a stablecoin is, precisely, stability — it provides a pricing mechanism that helps users evaluate and understand value. Price fluctuations around value serve as a dynamic regulator that balances purchasing power with economic growth.
Why U.S. dollar stablecoins?
First, the U.S. dollar has established relative universality within the fiat currency system. Second, it is extremely difficult to redefine a better consensus currency from scratch.
I’ve discussed this question — the idea of a “world currency stablecoin” — with several friends. Even if such a currency were issued based on a theoretically optimal pricing mechanism — say, tied to global historical GDP and annual GDP growth — it would still be unlikely to replace U.S. dollar stablecoins in practice, despite offering superior economic and financial efficiency. This is similar to the invention of Esperanto 140 years ago: even though it was designed through comprehensive linguistic optimization, it was never able to replace English’s first-mover advantage in global usage. Many countries with native languages — such as India, Singapore, and the Philippines — eventually adopted English as an official language. However, the version of English used in these countries has long since evolved independently from British standards. One could argue that these forms of “shadow English” operate entirely autonomously. Likewise, the GENIUS Act’s delegation of stablecoin issuance authority indirectly extends the dollar’s influence and control — very much like the way English proliferated through indirect global adoption.
The GENIUS Act was introduced at a critical turning point in history, precisely aligning with the need for transition. By leveraging the U.S. dollar’s current irreplaceable role as a global price anchor, it seeks to transform that position — via the mechanism of dollar stablecoins — into a long-term value anchor in the future crypto market. This is a clever and innovative design that maximizes historical advantage to unlock future potential. At its core, the concept of issuing dollar stablecoins backed by U.S. dollars and Treasuries is, in fact, a bold attempt to upgrade and reframe the dollar and U.S. Treasuries as a kind of second-order gold.
6.Global market reactions and the dramatic transformation of financial transactions and assets following the enactment of the bill
The implementation of the GENIUS Act will still take some time, and the same applies to stablecoin legislation in other countries and regions. Meanwhile, some markets have already begun to exhibit early-stage reactions driven by short-term sentiment, reflected in asset prices.
In the short term, the introduction of stablecoin legislation is likely to trigger significant shifts across financial institution assets, RWA, and crypto native assets. Opportunities will emerge alongside restructuring, while disorder and forward-looking growth expectations will coexist. The increased uncertainty around adjustments in traditional finance may lead to temporary price corrections across certain asset classes — which is a normal phenomenon. At the same time, renewed confidence in U.S. Treasuries as an anchor will provide counterbalancing support for the market. The strategic openness of this policy shift enables dollar-denominated assets to ride the second growth curve driven by crypto, effectively creating a second curve of expansion for U.S. dollar assets themselves. The forward-looking expectations derived from this process may partially offset the fear associated with short-term structural reshuffling — resulting in a complex, superimposed market environment.
From the perspective of the crypto market, this undoubtedly marks an excellent window for advancing asset management and financial innovation. RWAFi will gain access to more implementation channels and asset formats, creating favorable conditions for long-term institutional projects like CICADA Finance that focus on real yield asset management. This shift will facilitate a rapid transition and growth across sectors such as DeFi, PayFi, and RWAFi.
Author: Gary Yang
Date: May 26, 2025
Email: gary_yangge@hotmail.com
