Yang Ge Gary: GENIUS Act and on-chain shadow currency

The nominal purpose and the substantive purpose of the GENIUS Bill are clearly different. In simple terms: it is called compliance regulation internally, but externally it is actually for sample promotion.

Written by: Yang Ge Gary

In 25Q2, coinciding with several Crypto conferences in North America, the GENIUS Act ( was passed in the U.S. Senate with a vote of 66 in favor and 32 against on the 19th, guiding and establishing the advancement procedures for the U.S. Stablecoin National Innovation Act ). In less than a week, various financial and Crypto institutions rapidly iterated with each other; in the words of a friend, the entire market has become agitated.

The uniqueness of this bill lies in its significant impact on both the global short-term and long-term financial economy. There will be many layers that gradually accumulate, much like a strong earthquake close to the surface. If the GENIUS bill is successfully implemented, it will cleverly mitigate the impact of Crypto on the current financial status of the US dollar and US Treasury bonds, while also enhancing the value and liquidity of the Crypto Market linked to the US dollar. Essentially, it transforms the existing advantage of the dollar price peg into a long-term advantage of a value peg, aptly named Genius.

Based on the discussions at the conference in New York last week, the following relevant issues have been preliminarily summarized:

TL;DR

1. The fundamental reason for the decline in traditional dollar control;

2. Recognize the trade-offs and the decision-making of retreating for progress under the trend of Crypto driving changes in the global monetary system.

3. The nominal purpose and substantive purpose of the GENIUS Act;

4. DeFi Restaking: Insights for the Fiat World and the Currency Multiplier of Shadow Currency;

5. Gold, US Dollar, and Crypto Stablecoins;

6. Global market feedback after the bill takes effect and the dramatic changes in financial transactions and assets;

1. The Fundamental Reasons for the Decline of Traditional Dollar Control

The decline in the influence and control of the US dollar on the global economy has multiple dimensions of reasons. From a long-term perspective, various resource dividends have been largely exhausted since the modern era through the Age of Exploration to World War II. From a short-term perspective, the regulatory capacity of economic policies is gradually becoming ineffective. However, the essential factors that have led to the current situation can be summarized into the following four points:

i) With the rapid rise of the global economy and the national strength of various countries, the necessity of using the US dollar as the global commercial and financial settlement has decreased, and more countries and regions are establishing their own trade and currency settlement systems independent of the US dollar;

ii) During COVID19, the U.S. overissued more than 44% of the dollar volume, with M2 growing from $15.2 trillion to $21.9 trillion ( according to Federal data ), which has led to an irreversible process of declining dollar credit after the pandemic.

iii( The internal system of the United States Federal is rigid in its control methods for monetary and fiscal policy, leading to increasing entropy, severe asymmetry in capital efficiency and wealth distribution, and is not compatible with the needs of the new paradigm of digitalization and AI to drive economic growth.

iv) The rapid rise of the Crypto decentralized monetary and financial system adds to the above environmental background and disruptively subverts the traditional financial and economic system based on national credit since the Bretton Woods Law.

It is worth mentioning that the veteran financial entrepreneurs represented by Ray Dalio and some politicians have made a dogmatic mistake in their understanding of the Thucydides trap in the face of the above environment. Over the past decade, many have argued that the Thucydides Trap still exists or is about to happen between China and the United States, and have even used this topic as a basis for lobbying or investment strategies. In fact, the problems faced by China and the United States are completely the same, and should belong to the same side of the Thucydides trap, while the other side is the crypto financial system and the production relations of decentralized governance in the encrypted digital era. Clearly, the GENIUS Act is getting the point.

2. Recognizing the Trade-offs and Defensive Strategies in the Trend of Crypto Driving Changes in the Global Monetary System

Based on the above, the decision-making of the GENIUS Act is essentially a trade-off and trade-off, which marks the beginning of the Federal to accept the reality of the decline in the control of the traditional US dollar under the original financial system, and takes the initiative to further decentralize the issuance and settlement rights of the US dollar currency ) Note: Most of the fiat offshore US dollars themselves also come from the Federal off-balance sheet offshore bank credit expansion is a shadow currency. The authenticity of issuance and clearing is controlled based on the access system and compliance network, and is endorsed and filtered by sovereign-level central banks ), in the face of the inevitable trend of the development of Crypto finance, we will draw on the advanced gameplay of DeFi Restaking combined with the experience of off-balance sheet extension of the credit expansion of the offshore US dollar in the offshore banking system, and form a new type of “on-chain offshore structure” by encouraging compliance institutions to issue stablecoins. on-chain shadow currency" model, which further amplifies the currency multiplier effect of the US dollar in circulation.

The table below lists the characteristics comparison between the US dollar and various shadow currencies at different levels and attributes:

The decision and initiative of the GENIUS bill will effectively help the US dollar serve as a “re-anchor” to a large extent, not only restoring confidence among holders of US Treasury bonds and dollar assets but also allowing off-balance-sheet US dollars to rapidly expand through the growth of the Crypto Market, achieving the dual effect of turning risks into opportunities and killing two birds with one stone.

3. The Nominal and Substantive Purposes of the GENIUS Act

The nominal purpose and the substantive purpose of the GENIUS Act are clearly different. Simply put: internally it is called compliance regulation, while externally it serves as a model for publicity. It provides policy templates for financial management departments in other countries and regions, and uses the U.S. market as an example to offer implementation templates for financial institutions in other countries and regions, enabling the global adoption of U.S. dollar-pegged stablecoins in the Crypto Market more quickly.

In the short and internal term, of course, it is a direct compliance management purpose, to ensure the stability of the transition period in the process of the rapid development of the Crypto Market and the impact on the traditional financial market, which is the regular operation of the US financial legal system. In the long run, this time it has achieved an absolute proofing publicity effect, maximizing the use of the essential advantages of the US dollar as a price anchor in the traditional financial system, and combined with the pain point of extracting the price anchor of no other stablecoins in the Crypto Market except the US dollar, cleverly through a semi-compliant and semi-open way - specifically mentioning the restriction on overseas issuers in the bill: foreign stablecoin issuers that have not been approved by the US regulators are not allowed to operate in the US market, which is actually equivalent to prompting that they can operate in the US market outside the US. In order to stimulate and confirm the further reliance and use of the US dollar stablecoin in the process of Crypto Finance upgrade.

On May 21, the Hong Kong Legislative Council passed <稳定币条例草案>the policy, and it is expected that the Japanese Financial Services Agency JSA, Singapore’s MAS, and Dubai’s DFSA will also respond soon. Due to the special importance of the stablecoin niche and the rapid iterative changes triggered by the GENIUS Act, this is a great challenge for countries and regions with pre-existing bills, and it is very important to balance the boundaries and easing. If it is too loose, it will cause market chaos and management difficulty, and if it is too tight, it will quickly be left behind by the Crypto Market and lose the competitive advantage in finance, payment, and asset management in the next stage ( Note: Due to the Crypto Market With the characteristics of globalization, high liquidity and high interactivity, the independence of other fiat currency stablecoins relative to US dollar stablecoins may be more difficult to form, and PEGs may be more rigid ). In addition, the situation of countries with backward bills will not be better, and they will also encounter the dilemma of market chaos and backwardness and loss of competitiveness due to too rapid paradigm changes.

4. DeFi Restaking: Insights for the Fiat World and the Currency Multiplier of Shadow Currencies

An asset partner told me last week that the next stage of global finance is very challenging, and it is necessary to have a dual understanding and cross-understanding of traditional finance and crypto, otherwise it will soon be eliminated from the market. Indeed, in the past two cycles of DeFi development, Crypto Market has independently evolved a set of professional economic science systems based on digital protocols, from protocol logic, tokenomics, and financial analysis methods and tools, to the complexity of business models that have far exceeded those of traditional financial systems. Although CryptoDeFi is different from traditional finance, it still needs the empirical system of traditional finance to calibrate and compare in its development. The two learn from each other, develop rapidly, and continue to couple, forming a new financial system.

The introduction of this GENIUS bill bears a high degree of similarity to the Staking, Restaking, and LSD in the DeFi of past cycles, or it can be said to be another extension of the same methodology in the fiat currency world.

An example in DeFi: use ETH to obtain rebase stETH through Lido, stake stETH in AAVE to receive USDC worth 70% of the staked value, and then use the obtained USDC to enter the market to continue purchasing ETH. The ideal model for this repeated operation process is a geometric series with a ratio of q=0.7, which will ultimately yield a monetary multiplier of 3.3 times.

The above process can be implemented on the basis of the Franco-Belgian stablecoin in the near future under the GENIUS Act: suppose a Japanese financial institution outside the United States pledges U.S. bonds based on compliance conditions to issue USDJ, obtains JPY through off-ramp and exchanges to obtain USD, and then buys U.S. bonds to form a cycle. There are several hypothetical multipliers in the repeated operations of this process, one is that the pledge rate ( may be full, or it may be discounted or over-), the second is on/off-ramp and exchange wear, and the third is the market-based churn rate, all of which will also get a proportional multiplier q for a single cycle, and finally calculate the currency multiplier 1/(1-q). This multiple is the ideal condition that countries may get from the GENIUS Act and the subsequent financial amplification multiplier for the US dollar Treasury holdings in response to the stablecoin bill.

Of course, this does not include the excessive issuance by some informal institutions, as well as the other types of shadow assets obtained from further restaking of asset tokens after stablecoins are invested in assets. The flexibility of stablecoins will far exceed that of the derivatives market in the fiat currency world, and the “stablecoin asset nesting doll” will undoubtedly bring unimaginable impacts to the traditional financial market.

5. Gold, US Dollar, and Crypto Stablecoins

In a previous article titled , I mentioned the belief replacement of the three generations of financial system anchors. The three generations of financial assets are: gold, USD, and Bitcoin, which is viewed from a macro perspective. From a micro perspective, all three generations of finance need a daily settlement unit that you can hold in your hand. In the past, it was a gold ingot or a US dollar bill, but what will it be in the future?

As mentioned earlier, apart from the USD ( stablecoin ) there is no ( native Crypto) currency or asset in the Crypto Market that can be used as a price anchor for stablecoins, and the reason is: pricing is very important. In real world transactions, for a commodity, a service, there needs to be a relatively stable amount as an intuitive reference price, not a glass of American yesterday was 0.000038BTC, today is 0.000032BTC, which will make consumers and traders lose the ability to judge the value, the most important feature of stablecoins is stability, to help consumers and traders judge and understand the value in the way of price. Then the price around the price fluctuation is a dynamic regulator, satisfying the balance of consumption power and economic development.

Why is the US Dollar ( stablecoin )?

First, the U.S. dollar has established relative universality in the fiat world. Second, it’s hard to come back to a better definition of consensus. Of course, I have also discussed this issue with a few friends: stablecoins, the world’s currency. Assuming that its issuance is a more reasonable pricing mechanism based on the total global historical GDP and the annual increase in GDP, it will be difficult to gain consensus in social development to replace the position of the US dollar stablecoin, even if it has more optimal economic and financial efficiency than the current US dollar. This is like the invention of Esperanto 140 years ago, even if the algorithm has made the greatest comprehensive optimization, it is difficult to replace the leading market share advantage of English in the world, and many countries with native languages have finally chosen English as their official language in later development, such as India, Singapore, and the Philippines, although they use English but the standard has long been independent of the British English guidelines, it can be said that these “shadow English” are completely independent. The indirect influence control extended by the current decentralization of the US dollar stablecoin after the GENIUS Act is very similar to this example in English.

The proposal of the GENIUS Act is an ingenious and innovative design that takes advantage of the existing advantages of the US dollar as a price anchor in the current world, and transforms it into a long-term advantage of the future Crypto Market value anchor in the form of a US dollar stablecoin. In essence, the proposal of pledging US dollars and US bonds to issue US dollar stablecoins is actually a bold attempt to upgrade and transform US dollar US bonds into second-order gold.

6. Global Market Feedback and Dramatic Changes in Financial Transactions and Assets After the Bill Takes Effect

The implementation of the GENIUS bill will take some time, and the stablecoin bills in other countries and regions are the same. Some markets are beginning to respond to preliminary feedback on short-term sentiment based on asset prices.

In the short term, the introduction of the stablecoin bill will trigger drastic changes in the assets of financial institutions, RWA, and Crypto assets, and opportunities will be accompanied by restructuring, chaos and development expectations coexist, and the uncertainty of the adjustment of traditional finance will further increase, resulting in a correction in the price of some assets. The confidence of the U.S. bond anchor will inversely add and support the current market, and the open decision-making advantage will lead to the development of the second curve of the growth of the U.S. dollar asset plus Crypto, forming a second curve that belongs to the U.S. dollar assets themselves, and the expected advance obtained from this will also offset some of the panic of short-term restructuring, forming a more complex superimposed environment.

From the perspective of the Crypto Market, this is undoubtedly a great window to open further asset management and financial innovation. RWAFi will have more landing channels and asset forms, which is beneficial for all long-term institutional projects like CICADA Finance that focus on Real Yield Asset Management, facilitating rapid transition and development in the DeFi, PayFi, and RWAFi industries.