Unstable Coins: Stablecoin Regulation, Market Structure Legislation, and U.S. Security Risks

The United States spent the 2010s incrementally upgrading bank-based magnetic-stripe cards with chips. Meanwhile, China leapfrogged the legacy card-based system by rolling out digital wallets and QR-code-based payment systems. Rapid diffusion of Alipay and WeChat Pay drove near-universal urban adoption. Today, those platforms exceed 1 billion monthly users, enabling low-cost transfers and payments and largely disintermediating the banking system. The Chinese government embraced digital payments, generating economic, national security, and geopolitical dividends. Digital payments unlocked the latent potential of China’s rural consumer market, alleviating mobility constraints and diversifying consumption. The Chinese government then embedded this financial activity within systems of data collection, surveillance, and state influence. The increasing international adoption of these digital payments and their extensive interoperability support the government’s push for broader usage of Chinese currency. While the United States stagnated within its financial paradigm, China’s proactive adoption and regulation of revolutionary financial technologies offered massive national benefits.

Today’s cryptocurrencies represent a similar inflection point. As financial systems determine geopolitical leverage, sanctions enforcement, data sovereignty, and the global role of the U.S. dollar, competitiveness in this area is essential. However, in the United States, whose banking and payment systems have always been intertwined, the regulatory landscape is struggling to adjust. Concurrently, allies and adversaries alike embrace the new technologies, threatening to erode U.S. financial dominance and economic competitiveness. Without swift legislation to promote institutional adoption and mitigate financial and national security vulnerabilities, the United States risks ceding its global economic leadership while simultaneously exposing itself to perilous threats.

The GENIUS Act and Its Shortcomings

Signed into law in July 2025, the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act represents Congress’s first comprehensive attempt to establish a U.S. regulatory framework for payment stablecoins—digital assets that an issuer must redeem for a fixed value. It aims to ensure stablecoin safety and stability by enhancing dependability, oversight, and transparency, without limiting prospects for continued innovation.

However, in pursuit of these aims, the act could unintentionally compromise the United States’ global competitiveness. It creates regulatory fragmentation by dividing supervision between federal and state regimes, inviting a “race to the bottom” as states dilute requirements to attract issuers. The bill allows state-level regimes to differ and exempts state-issued stablecoins from the federal framework, enabling regulatory competition. Provisions upend host-state oversight and erode state authority to impose consistent standards. These gaps hinder oversight of stablecoin flows and leave the Federal Reserve and the Department of the Treasury with limited leverage.

The act leaves major gaps in stablecoin reserve composition and management. It imposes no hard liquidity, concentration, or stress-testing requirements and permits reserves in uninsured bank deposits and credit union shares. It further ties stablecoin risk to banking-sector stress, creating reciprocal exposure. These dynamics could create fire-sale patterns and turn a stablecoin run into stress on the banking system.

The act adds risk by leaving key financial details to future rulemaking. The act authorizes regulators to impose “capital buffers that are tailored to the business model and risk profile,” but offers no specifics on buffer design. Inappropriate capital buffer standards could leave stablecoins “information-sensitive,” prone to runs of sudden, self-reinforcing redemptions whenever doubts arise. The act also pushes the development of run-down and wind-down plans for future regulations. These flaws raise the risk that a large stablecoin issuer could become highly leveraged and poorly resolvable, precipitating a rapid, chaotic liquidation rather than orderly recapitalization or restructuring.

Together, these financial vulnerabilities create a systemic shock vector. A stablecoin run could cascade into U.S. banking stress, weakening U.S. economic performance relative to strategic competitors. Moreover, this potential for instability threatens U.S. financial system credibility, weakens U.S. agenda-setting power, complicates allied coordination, and could accelerate diversification away from U.S.-linked systems.

The act also maintains gaps that have the potential to weaken U.S. national security by allowing adversaries to influence U.S. financial infrastructure, expand gray-zone financial operations, evade sanctions, and launder stolen funds.

The act includes a pathway for foreign payment stablecoin issuers (FPSIs) but does not require rigorous screening of foreign governance structures. It delegates judgment of foreign-jurisdiction regimes to the Treasury, which has yet to finalize an oversight framework, leaving key risks unaddressed. Insufficient oversight of ultimate ownership and controlling interests might allow adversaries to influence an FPSI, creating national security risks. Moreover, if the Treasury defines comparability rules loosely, issuers will flock to the most permissive jurisdiction and still access the U.S. market.

Additionally, the act overlooks illicit finance opportunities. It imposes anti-money-laundering (AML) and counterterrorist-financing (CFT) requirements but focuses only on stablecoin issuers. Under GENIUS, the Bank Secrecy Act (BSA) does not regulate digital-asset intermediaries or decentralized protocols through which digital assets like stablecoins circulate. This creates a gap that malign actors exploit. Adversarial use of stablecoins to evade sanctions has increased substantially in the last year.

Financial weaknesses and national security flaws leave the GENIUS Act an incomplete framework for stablecoin regulation with the potential to negatively impact the United States’ position on the global stage.

Market Structure Legislation Flaws

In July 2025, the House passed the Digital Asset Market Clarity (CLARITY) Act, which addresses jurisdictional ambiguities between the Securities and Exchange Commission and the Commodity Futures Trading Commission by categorizing digital assets into commodities, investment contracts, and stablecoins. The Responsible Financial Innovation Act (RFIA) of 2025 reflects the Senate Banking Committee’s ongoing effort to develop a more comprehensive market structure that builds on the CLARITY Act.

Senator John Kennedy addressed the GENIUS Act’s financial vulnerabilities in his floor remarks and stated that the banking community expects policymakers to amend digital asset market structure legislation to mitigate risks. Similarly, Senator Elizabeth Warren discussed the GENIUS Act’s national security gaps in a letter to Secretary of the Treasury Scott Bessent, concluding that Congress has an opportunity to address risks in market structure legislation.

However, rather than alleviating GENIUS Act financial weaknesses, ongoing efforts overlook critical risks and threaten to institutionalize existing vulnerabilities.

These bills risk cementing structural financial vulnerabilities and creating space for regulatory arbitrage. The Conference of State Bank Supervisors warns that the RFIA allows “uninsured national trust companies to exercise a broad range of banking powers... while simultaneously avoiding a range of corresponding regulatory mandates.” Separately, economic analysts warn the RFIA invites “issuers of traditional securities to circumvent investor protections” by creating tokens that “function like investments but avoid customary labels.” The current approach imperils “investor protection, market integrity, and the credibility of the securities regulatory framework itself.” This failure extends beyond digital asset markets, threatening to undermine the foundation of U.S. capital markets and the integrity of the U.S. financial system.

By failing to resolve financial vulnerabilities, these bills threaten to entrench the systemic shock vector created by the GENIUS Act. This exacerbates problems for U.S. economic competitiveness, and further undermines U.S. financial-system credibility, agenda-setting power, and prospects for allied coordination—all to the benefit of geopolitical adversaries.

These bills also risk sustaining the gaps in national security that exist in the GENIUS Act, amplifying adversaries’ ability to compromise U.S. interests.

The CLARITY Act obscures the status of certain digital asset service providers (DASPs) relative to the BSA, potentially limiting the government’s ability to detect, deter, and disrupt money laundering, terrorist financing, sanctions evasion, and other financial crimes. In contrast to other persistent gaps, the RFIA, as initially drafted, does mitigate this issue. It clarifies that these DASPs qualify as financial institutions under the BSA. However, it includes broad decentralized finance (DeFi)–related carveouts that limit oversight of other non-DeFi businesses and persons.

The CLARITY Act establishes a broad DeFi exclusion covering user-interface provision and DeFi system development and distribution. The RFIA fails to resolve this issue. Via definitional exclusions and functional ambiguity, it exempts transaction-intermediating and custodial platforms from basic AML/CFT safeguards.

These market structure bills also fail to enforce baseline issuer monitoring of the stablecoin ecosystem. Currently, only issuers concerned about illicit finance pay the cost to implement ecosystem monitoring services. This poses a significant threat amid rising illicit stablecoin use. Since 2024, most on-chain illicit activity has involved stablecoins. Without widespread monitoring, stablecoins will become an increasingly attractive avenue for criminal behavior.

Reinforcing this failure, these bills leave mixers and anonymity tools unaddressed. They fail to close a loophole left by the U.S. Court of Appeals for the Fifth Circuit’s 2024 Van Loon decision, which holds that immutable smart contracts do not constitute property. This limits the government’s ability to use existing sanctions laws against such contracts used for money laundering or sanctions evasion. These mixers and anonymity tools enable state-linked adversaries to avoid detection and enforcement when using stablecoins for illicit activities, threatening U.S. national security.

Last, these market structure bills would allow crypto platforms to evade regulatory accountability by claiming they operate outside the United States. The Treasury’s 2023 Illicit Finance Risk Assessment of Decentralized Finance highlights the vulnerability created by this regulatory gap. The assessment finds the most significant risk associated with virtual assets stems from “virtual asset service providers operating abroad with substantially deficient AML/CFT programs.”

Rather than closing GENIUS Act national security gaps, current market structure initiatives risk elevating these threats, further enabling adversaries to impact the U.S. financial ecosystem, circumvent U.S. sanctions, and hide theft.

By compounding the GENIUS Act’s financial and national security vulnerabilities, ongoing market structure efforts risk impairing the United States’ ability to outcompete economic rivals and defend against adversarial efforts to jeopardize its national security, thereby destabilizing the country’s geopolitical leadership.

Necessary Urgency

Regulatory uncertainty threatens a strategic reallocation of capital to jurisdictions offering more clarity, intensifying current threats to U.S. financial stability.

Disparities between the GENIUS Act, the CLARITY Act, and the RFIA have led to fragmented compliance expectations and operational uncertainties. As political divisions delay regulatory implementation, other regions will continue to establish clear frameworks and accelerate cryptocurrency adoption. This clarity could attract investors seeking a stable legislative environment, triggering capital flight risks that undermine the U.S. economy.

The European Union passed the Markets in Crypto-Assets Regulation (MiCA) in 2022, instituting uniform EU market rules for crypto assets through multiple implementation phases. The law establishes a cohesive system for licensing and supervising crypto asset service providers and stablecoin issuers, focusing on transparency, disclosure, authorization, and supervision of transactions. The framework aims to support “market integrity and financial stability” and ensure “consumers are better informed” about crypto asset risks.

Other regulatory environments have implemented similarly proactive frameworks. Singapore and Hong Kong, for example, each enforce clear and extensive market structure, monitoring, and security legislation.

These global efforts to offer clarity and confidence could easily attract investors looking to diversify away from U.S. regulatory uncertainty. This capital flight risk imposes considerable urgency on current crypto legislation initiatives. Policymakers should mitigate financial and national security vulnerabilities in existing frameworks—but it is equally crucial that they do so quickly. If Congress fails to implement necessary changes with urgency, it risks forsaking the United States’ competitive edge in the global crypto arena.

Prospects for Progress

Congress retains opportunities to adjust market structure legislation to address the GENIUS Act’s weaknesses. If policymakers approach this effort with recognition of the vulnerabilities in the current landscape of cryptocurrency regulation and an acceptance of the urgency with which changes are required, they can substantially strengthen the framework.

Before passing any market structure legislation, policymakers should make the following crucial changes:

• Apply AML/CFT responsibilities to digital asset service providers.
• Ensure the Treasury can impose AML obligations on DeFi when DeFi functions like a financial institution.
• Close the Van Loon sanctions loophole.
• Require all stablecoin issuers to implement risk-based and operationally feasible ecosystem-wide monitoring, as enabled by existing techniques and commercially available tools.
• Enforce Treasury oversight requirements for international crypto platforms.
• Close gaps that are creating structural financial weaknesses.

Policymakers should take additional steps to regulate stablecoins, including establishing clear liquidity and concentration requirements, a defined resolution regime, coordinated supervision, rigorous foreign-issuer screening, enhanced AML/CFT coverage, and greater transparency.

Policymakers should also acknowledge the urgent necessity of these changes to digital asset legislation to bolster U.S. economic competitiveness, reinforce U.S. national security, and uphold global standards for countering illicit finance.

Peter Dohr is a research intern with the Strategic Technologies Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Taylar Rajic is an associate fellow with the Strategic Technologies Program at CSIS.