After years of turmoil, Congress has passed the first major piece of federal crypto regulation. The “Guiding and Establishing National Innovation for U.S. Stablecoins Act” (the GENIUS Act) provides a comprehensive regulatory framework for the stablecoin business. A cause to celebrate? Some will certainly think so (participants of the party co-hosted by Coinbase and Circle after the House vote, for example). Others fear that the U.S. is entering another chaotic Free Banking Era.

One issue should be on the mind of people on both sides of the argument: how the GENIUS Act regulates foreign issuers. The stablecoin business is inherently international. Cross-border payments are what stablecoins might prove to do best – they are also one of the ways in which unregulated stablecoins might enter U.S. payment streams and erode trust in “digital dollars.” The international dimension of stablecoin regulation is personified by Tether, the world’s largest stablecoin issuer, newly domiciled in El Salvador, whose USDT stablecoin has reached a market cap of over 138 billion dollars. To some, Tether is the Act’s “big loser,” while others fear that U.S. law provides yet too many loopholes for Tether and other foreign issuers.

This post will take a look at how the GENIUS Act regulates foreign issuers, how this approach compares to those of the EU and the UK, and how it could be improved.

Foreign Issuers Under the GENIUS Act

Worries about foreign-issued stablecoins reaching the U.S. get to the core of what makes stablecoins different: As “digital bearer instruments” they require regulation like a bank or a money transmitter, yet they get distributed much like securities (just without the same level of regulation). In other words: stablecoins separate the financial service from infrastructure. Unlike account-based payment systems they do not require a direct relationship between the service provider and the user.

Generally speaking, there are three ways to get your hands on stablecoins. Some issuers, first, offer them directly to the public. Alternatively, they are available for purchase from third parties, including trading on crypto trading platforms. Last, stablecoins can proliferate “naturally” via payment chains in exchange for goods and services.

In legal terms, access to foreign-issued stablecoins is a question of extraterritoriality. Originally, the GENIUS Act did not specifically address extraterritoriality. Some (including myself) had argued for change – and Congress delivered. The final Act includes new prohibitions and an express rule on extraterritoriality, directly affecting how U.S. persons can acquire foreign-issued stablecoins.

Under the GENIUS Act, U.S. persons can no longer purchase stablecoins from foreign issuers without a U.S. license. Sec. 3(a) generally prohibits the issuing of stablecoins without a license, after the Act becomes effective under Sec. 20. This prohibition has been granted express extraterritorial effect under Sec. 3(e), providing the evidence for congressional intent necessary under Morrison v. National Australia Bank (and subsequent Supreme Court case law). Under this rule, the prohibition applies to all stablecoins offered or sold to a person located in the U.S. This statutory rule mirrors developments in crypto litigation. Some U.S. courts (but not all, see e.g. Holsworth v. BProtocol Foundation et al.) have similarly applied federal securities law to all crypto-related activities involving U.S. persons. In 2024, the Second Circuit adopted this reasoning in Williams v. Binance (cert. denied), though it remains unclear whether the court relied on this as a sole basis. This, however, is how some courts have interpreted and followed the decision (see SEC v. Balina, Hardin v. TRON Foundation et al., and Lee v. HDR Global Trading et al., but note SEC v. Schueler). The extraterritorial effect anchored to persons located in the U.S. is also in line with some state stablecoin regimes (see California Financial Code § 3103 and 23 CRR-NY I 200.2(q)), although not all state crypto regimes cover stablecoins specifically.

Sec. 3(e) is a bright-line rule. It is to be hoped then that courts will not carry over another product of crypto case law. Some U.S. courts have, since the beginning of crypto litigation, tended to apply U.S. law based on the fact that U.S. servers or nodes were used in the transaction (see In Re Tezos Securities Litigation). Most notably this is also supported by the Second Circuit’s decision in Williams v. Binance (though, again, it is not clear whether this is a sole basis for the decision). This approach has little, if anything, to do with what stablecoin regulation is supposed to do.

Foreign issuers may still issue stablecoins in the U.S. under the exemption of Sec. 18. Under this rule, the Treasury may, under recommendation from a member of the Stablecoin Certification Review Committee, determine that “a foreign country has a regulatory and supervisory regime that is comparable to the requirements established under this Act” (Sec. 18(b)(1)). Note that this is now a unilateral decision that does not require reciprocal access. The original draft was different, relying instead on reciprocal agreements negotiated by the Federal Reserve. Stablecoins issued by an issuer licensed in a country designated under Sec. 18 are not subject to the general prohibition of the GENIUS Act. Instead, they must register with the Comptroller and hold “reserves in a United States financial institution sufficient to meet liquidity demands of United States customers” unless there is an additional reciprocity agreement under Sec. 18(d).

Under Sec. 3(c) of the Act, the Secretary of the Treasury can adopt “limited safe harbors” which may, however, only apply to a de minimis volume of transaction. Safe harbors are not exemptions. Rules under Sec. 3(c) cannot restrict the scope of U.S. law, e.g. by providing an exemption for unsolicited transactions inspired by Rule 15a-6 (17 CFR § 240.15a-6), which applies to broker-dealers.

Whether U.S. persons can still buy foreign-issued stablecoins from third parties is a more complicated question. Under the Act, “digital asset service providers” are prohibited from selling or offering stablecoins that are not issued by a permitted issuer (Sec. 3(b)(1)). This rule extends to foreign issuers – evidenced by the fact that it expressly does not apply to issuers exempt under Sec. 18 (which applies only to foreign issuers). And it also applies extraterritorially to all transactions involving persons located in the U.S. under Sec. 3(e). Foreign digital asset service providers, therefore, are equally barred from offering or selling unregulated stablecoins.

This prohibition, however, only takes effect in three years’ time. Until then (and afterwards still), under Sec. 3(b)(2), foreign-issued stablecoins may not be offered, sold, or otherwise made available where the issuer does not comply with lawful orders under federal law (e.g. AML and CTF obligations) or reciprocal arrangements under Sec. 18. The Act provides a procedure in Sec. 8 for how the Treasury may designate individual issuers as non-compliant, forcing their delisting.

The prohibition on sales by third parties, however, hinges on what a “digital asset service provider” is. Sec. 2(7)(B) of the Act excludes some activities from the definition of a service provider, notably running a liquidity pool or similar mechanisms for peer-to-peer transactions or operating self-custodial wallets. This is what Democratic staff in the Senate have called the “DeFi-loophole.”

Finally, there is no rule under the GENIUS Act that bars payments to U.S. persons in foreign-issued stablecoins unless the mechanics of the transaction violate the prohibition under Sec. 3(b). Peer-to-peer transactions, most importantly, remain entirely possible. There is also no way for the Treasury to effectively implement offering restrictions, such as those included in Regulation S (17 CFR § 230.903), for foreign issuers, requiring them to prevent a flow-back of stablecoins into the U.S. The Treasury may, of course, include such restrictions in their safe harbor rules, but violating them will not in and of itself trigger application of U.S. law. This is another issue the SEC had run into in their wave of crypto litigation: Violating Regulation S does not necessarily make an ICO subject to U.S. law. [1]

Once a U.S. person gets ahold of a foreign-issued stablecoin there is also no rule in the GENIUS Act prohibiting foreign issuers from redeeming such a token, unless one were to argue that a redemption qualifies as an issuance under Sec. 3(a) of the Act. Such an interpretation would, however, hardly be compatible with the black letter of the law.

A Comparative Perspective

What to think, then, of the new approach to extraterritoriality? First, it is good news that the Act includes an express rule on extraterritoriality, isolating it from the ambiguities of extraterritoriality doctrine that have plagued crypto litigation for years, and most importantly isolating it from the chaotic crypto case law on extraterritoriality itself.

The practical effects of the rule are best looked at in comparison: Under the EU’s Markets-in-Crypto-Assets-Regulation (MiCAR), issuers of “asset-referenced tokens” (ART) and “e-money tokens” (EMT), defined in Art. 3, para. 1, no. 6 and 7 of MiCAR, are generally subject to EU law in two cases. One is if they offer their token to the public in the EU, which requires targeting EU persons. The other is if they seek admission to trading on an EU trading platform. The European Securities and Markets Authority (ESMA) has also stated that trading platforms may not, on their own initiative, list non-compliant ARTs and EMTs on their platform. That, however, is a non-binding interpretation of the law and has been subject to criticism (see e.g. here).

Even under these rules, however, EU persons may still purchase foreign-issued stablecoins on third-country trading platforms that operate under the reverse solicitation rule of Art. 61 of MiCAR, though under ESMA guidelines businesses have a tightrope to walk to make that exemption work. EU persons also have access via DeFi protocols under the European DeFi exemption of recital 22 of MiCAR. Finally, they can even purchase stablecoins directly from foreign issuers that do not target EU customers, which is, essentially, another reverse solicitation rule. In exchange, EU law does not provide access to foreign issuers under a system of substituted compliance.

For EMTs, however, which, to date, are the only practically relevant category (no ART licenses have been granted), EU law includes another sweeping rule: All EMTs referencing an EU currency are deemed to be offered in the EU (Art. 48, para. 2 of MiCAR). In theory, therefore, EU law applies to every single issuance of an EMT referencing an EU currency. This effectively ends all access to foreign-issued EMTs in those currencies – there can be no more foreign-issued EMTs in the first place. As a result, there is also no risk of foreign-issued stablecoins flowing into EU payment streams via reverse solicitation or in exchange for goods and services.

In the UK, a much softer approach is taking shape. Under the draft regulation published by the UK Treasury, stablecoins are only regulated when issued from an establishment in the UK (Sec. 9M of the proposed Regulated Activities Order). Stablecoins issued abroad may still be traded on UK exchanges. This is in line with how the UK regulates overseas payment service providers: Under FCA guidance service providers based in other jurisdictions may offer internet-based services to UK persons without a UK license under the Payment Services Regulations 2017 (PSRs)—a policy that the New York DFS, for example, scrapped in 2011 under money transmitter regulations. Originally, the UK had also planned to amend the PSRs to provide rules for regulated payment service providers using stablecoins. Those rules were supposed to include specific provisions on how payment service providers may use “overseas stablecoins.” Crucially, these new rules were meant to apply to all payment chains involving UK consumers, even where the service provider is located outside the UK. The amendment of the PSRs, however, was put on hold in November 2024.

The U.S. Approach in Contrast

In contrast, then, the U.S. approach is one on the stricter side. UK regulation, if passed as drafted, would not affect foreign issuers at all, although the UK, too, receives a significant in-flow of, for example, Tether’s USDT and Circle’s USDC, according to recent research. Leaving aside the currency rule for a moment, the EU and the U.S. approach are similar in that they restrict but do not bar foreign-issued stablecoins, yet they differ in how they manage that access. EU law relies on reverse solicitation; U.S. law relies on substituted compliance. In theory, the U.S. approach is both more principled and effective because it requires comparable oversight but allows for sustainable market access where there is comparable oversight. The EU meanwhile does not require any license to access the market via reverse solicitation while at the same time making cross-border market access unsustainable as a business model because the conditions for reverse solicitation are very narrow. The fact that EU law lacks a mechanism for substituted compliance has (rightfully) been met with regret (see here and here). And finally, the DeFi exemption is also something U.S. and EU law share, and while it is certainly a practical loophole, it is also a symptom of the fact that no jurisdiction has really gotten its head around how to regulate DeFi effectively. That said, of course, both the EU and the U.S. approach will be burdensome to enforce in comparison to the UK approach – cross-border enforcement is always complicated.

On a theoretical level still, the currency rule in EU law is what stands out as a major difference between the EU and the U.S. For the EU, it is a welcome fix for the structural problem of cross-border stablecoin regulation: Stablecoin regulation regulates the issuance and ongoing management of a stablecoin, yet whether a stablecoin needs to be regulated under domestic law depends on what third parties do with a stablecoin after it is issued. Similar structural problems have plagued the EU in other areas of cross-border regulation: Under the EU AI Act, EU law applies to AI systems placed on the market in third countries once outputs produced by the systems are used in the EU – a rule that is both problematic in theory and likely ineffective in practice. In stablecoin regulation, however, the currency nexus provides both a justification under international law and a sufficient policy argument to regulate, because there is a high risk that a stablecoin denominated in an EU currency will end up in the EU – and because EU customers have less need for access to foreign-issued stablecoins if they are denominated in their own currency. For U.S. regulation, there is no such easy fix that would not at the same time upend the global stablecoin business in which over 99% of all stablecoins in circulation are denominated in U.S. dollars. For better or worse, the loophole and flow-back risks still present under the GENIUS Act are a by-product of global U.S. dollar dominance (in the stablecoin business especially).

That said, there are further steps that U.S. regulation could take to minimize the risk of foreign-issued stablecoins destabilizing U.S. payment systems. U.S. law could implement further offering restrictions for foreign issuers to prevent the flow-back of stablecoins (just not as a safe harbor under Sec. 3(c) of the Act). However, those would be hard to police. Instead, the U.S. could also introduce a monitoring system for foreign-issued stablecoins and require them to apply for a license once distribution of their stablecoin reaches a threshold where it poses a significant risk to the U.S. payment system. Of course, this faces twice the amount of practical problems, once for the monitoring and then for enforcement against foreign issuers. Finally, in a much simpler fix, U.S. law could place restrictions on redemptions by foreign issuers, making foreign stablecoins unattractive for U.S. persons. However, many stablecoin issuers today impose strict limits and high fees (see e.g. for USDT) on redemptions anyway (one of the reasons why regulation is warranted), and that has not stopped people from using them. And, in a crisis, barring redemptions will only make things worse. All these restrictions also risk cutting U.S. businesses and consumers off from stablecoins that could significantly lower costs of their cross-border payments.

In theory, therefore, the GENIUS Act provides a solid, comparatively strict framework for foreign-issued stablecoins. Yes, more restrictions would have been possible – but those would be hard to police and could block U.S. businesses and consumers from using stablecoins where they are most useful. In theory, what is lacking in protection is not a product of bad regulation – it is a product of U.S. dollar dominance in the stablecoin market. In practice, of course, all this remains true only where the Act is sufficiently enforced. Sec. 18 especially could well become, as some fear, a loophole for non-compliant offerors, if jurisdictions with lax oversight gain reciprocity status. Until enforcement kicks in, the future of foreign-issued stablecoins in the U.S. remains uncertain.

Benedikt Bartylla is a Research Associate and PhD candidate at the Institute for the Law and Regulation of Digitization (IRDi), Philipps-University Marburg, Germany. This post is based on research conducted as a Visiting Researcher at the University of Pennsylvania Carey Law School in 2024.

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[1] See SEC v. Ripple Labs, Inc., No. 20 Civ. 10832 [AT] [SN], 2022 U.S. Dist. LEXIS 43497 (S.D.N.Y. Mar. 11, 2022).