On July 18, 2025, President Trump signed into law the Guiding and Establishing National Innovation for U.S. Stablecoins Act, otherwise known as the GENIUS Act. The purpose of the GENIUS Act is to establish a comprehensive regulatory framework for stablecoins in the United States. However, the GENIUS Act also makes several important changes to the U.S. Bankruptcy Code which gives stablecoin holders significant power and leverage over bankruptcies filed by stablecoin operators but also threatens those bankruptcies with administrative insolvency.
What is a Stablecoin?
A stablecoin is a cryptocurrency whose value is pegged to an asset with a stable value, most commonly the U.S. Dollar. The goal of stablecoins is to combine the benefits of digital currency with the stability of fiat currency. For instance, where the stablecoin is tied to the value of the U.S. Dollar, the stablecoin issuer will hold in reserve one Dollar for each issued stablecoin. It is this reserve that provides stability to the value of the stablecoin.
Enhanced Priority of Stablecoin Holders
Perhaps the most striking change that the GENIUS Act makes to the Bankruptcy Code is that it grants stablecoin holders a super priority interest in the stablecoin reserve established by the stablecoin operator. Specifically, Section 11(a)(1) of the GENIUS Act provides that a person holding a stablecoin shall have priority “over the claims of the permitted payment stablecoin issuers and any other holder of claims against a permitted payment stablecoin issuer, with respect to required payment stablecoin reserves.” Section 11(a)(3) of the GENIUS Act provides, however, that the priority granted under Section 11(a)(1) “shall not apply to claims other than those arising directly from the holding of payment stablecoins.” In sum, stablecoin holders are granted a first priority security interest in the stablecoin reserves, but solely to the extent that their claims arise from their stablecoin holdings.
If the stablecoin reserves are insufficient to pay the claims of the stablecoin holders, the holders are granted a superpriority claim. Specifically, Section 11(d)(2) of the GENIUS Act provides that if the stablecoin reserves are insufficient, the remaining claims of the stablecoin holders “shall have first priority over any other claim, including over any expenses and claims that have priority under [Section 507(a) of the Bankruptcy Code].” Therefore, stablecoin holders whose claims are not satisfied by the stablecoin reserve are granted claims that are superior to all other claims, including tax claims, employee claims and claims arising from the administration of the bankruptcy proceeding itself.
Exception to Property of the Estate
As bankruptcy practitioners know, property of the bankruptcy estate is broadly defined under section 541(a) of the Bankruptcy Code. The GENIUS Act, however, provides in Section 11(e)(3) that stablecoin reserves are not property of the bankruptcy estate. This puts stablecoin holders in a much better position than holders of other cryptocurrency assets who found out during the “crypto winter” that began in 2022 that their deposited cryptocurrency assets were owned by the cryptocurrency exchange and that they had only unsecured claims for the value of their cryptocurrency assets. (See (US) Who Owns the Crypto: Bankruptcy Court Rules That Customers Do Not Own The Deposited Crypto | Restructuring GlobalView). Under the GENIUS Act, stablecoin holders will not be faced with the same loss. Moreover, because the stablecoin reserves are not property of the estate, the reserves cannot be surcharged under section 506(c) of the Bankruptcy Code to cover expenses of the estate representatives in preserving the reserves.
Interestingly, while the stablecoin reserves are not included in property of the estate, the GENIUS Act still provides that the automatic stay under Section 362(a) of the Bankruptcy Code applies to the reserve. Specifically, Section 11(c)(1) specifies that “the redemption of payment stablecoins … from payment stablecoin reserves” are subject to the automatic stay. However, Section 11(c)(2) of the GENIUS Act establishes an expedited procedure for stablecoin holders to seek relief from the automatic stay in order to redeem the stablecoins. Under Section 11(c)(2), the bankruptcy court, if it determines that there are reserves available for distribution on a ratable basis to similarly situated stablecoin holders, is required to “enter a final order to begin distributions … not later than 14 days after the date of the required hearing [on the stay relief motion].”
A New “Trustee”?
Under Section 11(f) of the GENIUS Act, the Comptroller of the Currency or a State payment stablecoin regulator is given standing to appear in any stablecoin issuer bankruptcy. In fact, Section 11(f) requires the Comptroller of the Currency or State regulator to “raise, and … appear and be heard on, any issue, including the protection of customers,” in a bankruptcy case where the debtor is a permitted payment stablecoin issuer. This is in addition to the U.S. Trustee, as well as any committee appointed by the bankruptcy court.
What is the Impact of the GENIUS Act on Bankruptcy Cases?
While the main purpose of the GENIUS Act is to establish a regulatory framework for stablecoins, the Act’s modification of the Bankruptcy Code will have a dramatic impact on any stablecoin issuer bankruptcy.
What is the Impact of the GENIUS Act on Bankruptcy Cases?
While the main purpose of the GENIUS Act is to establish a regulatory framework for stablecoins, the Act’s modification of the Bankruptcy Code will have a dramatic impact on any stablecoin issuer bankruptcy.
First, the GENIUS Act may make Chapter 11 unaffordable since legal expenses cannot be paid from the stablecoin reserves. Further, the reserves cannot be used as collateral for any debtor-in-possession (DIP) financing. Therefore, in the absence of stablecoin holders voluntarily agreeing to subordinate their claims, a stablecoin issuer may be administratively insolvent from the very inception of the case. Second, if a stablecoin issuer were able to find a lender willing to consider DIP financing, the borrowing costs are most likely going to be higher to minimize the risk associated with administrative insolvency. Third, it may be difficult for a stablecoin issuer to obtain bankruptcy representation in the first place given the risk of non-payment.
In sum, the GENIUS Act may ultimately make it more difficult for a stablecoin issuer to reorganize. Instead, insolvent issuers may ultimately decide to simply permit stablecoin holders to redeem from the reserves and to then liquidate.
