The enactment of the GENIUS Act of 2025 marks a watershed moment in American cryptocurrency regulation, establishing the first comprehensive federal framework for payment stablecoins.[1] Yet within this law lies a provision that may fundamentally reshape the balance between federal oversight and state innovation: the explicit exemption of state-issued stablecoins from federal regulatory requirements.[2]

As Wyoming’s Frontier Stable Token (FRNT) becomes the first state-issued digital currency to test this exemption, the United States finds itself navigating uncharted territory where traditional federalism principles collide with cutting-edge financial technology.[3] The implications extend far beyond cryptocurrency markets, potentially reviving constitutional questions about state sovereignty in monetary policy that echo debates from the Civil War era.[4]

Federal-State Regulatory Framework Under the GENIUS Act

The GENIUS Act attempts to harmonize the fragmented landscape of cryptocurrency regulation through several key mechanisms. Central to this effort is the State Collaborative Regulatory Committee (SCRC), which requires federal regulators to coordinate with state authorities and consider state regulatory frameworks when developing federal standards.[5] The act’s “substantially similar” standard allows states to maintain their own regulatory approaches provided they offer equivalent protections to federal requirements.[6]

This framework reflects Congress’ recognition that states have been the primary innovators in cryptocurrency regulation, with jurisdictions like Wyoming, New York, and Texas developing comprehensive regulatory structures well before federal action.[7] The act preserves this state leadership while establishing minimum federal standards, creating what practitioners describe as a “regulatory floor rather than a ceiling” approach.[8]

Nevertheless, the coordination mechanisms face practical challenges. The “substantially similar” standard lacks a precise definition, creating uncertainty for multi-state stablecoin issuers about compliance requirements.[9] Moreover, the SCRC’s advisory role may prove insufficient to resolve fundamental disagreements between federal agencies and state regulators about appropriate oversight.

The State Exemption: A Constitutional Carve-Out

The GENIUS Act’s most significant federalism provision appears in its definition of “person,” which explicitly excludes state governments from federal stablecoin regulations.[10] This exemption effectively grants states sovereign immunity from federal oversight of their own digital currency initiatives, creating a parallel regulatory universe where state-issued stablecoins and private alternatives operate under entirely different rules.

Wyoming’s FRNT exemplifies this exemption in practice. As the first state-issued stablecoin, FRNT operates under Wyoming’s view that state sovereignty exempts it from federal compliance requirements that would apply to privately issued tokens with identical technical characteristics. Backed by Wyoming’s State Loan and Investment Board reserves and operating through the state’s Division of Banking, it represents the most completely government-controlled stablecoin experiment in U.S. history.

Nebraska has followed with its own state stablecoin legislation, creating a laboratory for different approaches to state-issued digital currencies.[11] These initiatives test whether states can leverage their sovereign status to create competitive advantages in the digital asset space while maintaining appropriate consumer protections.

Implications and Market Dynamics

The state exemption raises profound questions about the future of American monetary federalism. Legal scholars draw parallels to Civil War-era tensions between state and federal banking systems, noting that the current framework could lead to the kind of fragmented monetary landscape that the National Banking Act of 1863 sought to resolve.[12] Unlike nineteenth-century state banknotes, digital stablecoins circulate seamlessly across state lines, amplifying both benefits and risks of regulatory divergence.

This exemption creates clear opportunities for regulatory arbitrage. States with more permissive stablecoin frameworks can attract digital-asset businesses and investment, with Wyoming’s early mover advantage potentially positioning it as a blockchain innovation hub. But this dynamic pressures other states to reduce regulatory standards to remain competitive, which could result in a classic “race to the bottom” scenario that could undermine consumer protection.

The market fragmentation risks could cause substantial practical problems. State-issued stablecoins could fragment liquidity pools and create interoperability challenges if different states adopt incompatible technical standards or backing requirements. Businesses operating across multiple states face compliance complexity when navigating both federal requirements for private stablecoins and varying state frameworks for government alternatives.

Conversely, state competition might drive innovation in stablecoin design and governance. Wyoming’s approach emphasizes transparency and full reserve backing, potentially setting higher standards than federal minimums require. Other states may experiment with different backing mechanisms, governance structures, or use cases, creating a natural laboratory for testing approaches to digital currency management.

Federal agencies retain indirect influence through their oversight of banks and financial institutions that interact with state-issued stablecoins.[13] The Federal Reserve, FDIC, and OCC could limit state stablecoin utility by restricting federally-regulated banks from providing services to state programs. Additionally, FSOC retains authority to designate systemically important payment systems, which could encompass successful state stablecoin programs.

Market acceptance will ultimately determine the exemption’s success. State-issued stablecoins must demonstrate utility beyond their regulatory advantages to achieve meaningful market share. Early indicators suggest mixed reception as some participants view state backing as a trust enhancement, while others prefer the flexibility of private alternatives.

What’s Next for Stakeholders

Market participants should prepare for a bifurcated stablecoin landscape where compliance strategies must account for both federal regulations governing private issuers and state frameworks for government alternatives. Financial institutions should monitor federal guidance on permissible interactions with state-issued tokens, while regulatory agencies are expected to clarify the boundaries of state exemptions.

State governments face strategic decisions about pursuing their own stablecoin programs and balancing innovation incentives with consumer-protection obligations. The success or failure of early adopters like Wyoming and Nebraska will significantly influence other states’ approaches.

Conclusion

The GENIUS Act’s state exemption provision represents a fascinating experiment in digital-age federalism, testing whether nineteenth-century principles of state sovereignty can effectively govern twenty-first-century monetary innovation. While the exemption preserves state autonomy and encourages regulatory competition, it creates risks of fragmentation and regulatory arbitrage that could undermine the act’s broader harmonization goals.

The early experiences of Wyoming’s FRNT and similar initiatives will provide important data about the viability of state-issued stablecoins and their impact on broader financial stability. As this new exemption era unfolds, the United States may witness the emergence of a novel form of monetary federalism – one where digital innovation and constitutional principles converge to reshape the fundamental relationship between state and federal authority in the financial system. Whether this convergence produces innovation or  fragmentation remains the defining question of America’s stablecoin regulatory future.

ENDNOTES

[1] Gibson Dunn, The GENIUS Act: A New Era of Stablecoin Regulation (2025), available at https://www.gibsondunn.com/the-genius-act-a-new-era-of-stablecoin-regulation/.

[2] S.394 – GENIUS Act of 2025, 119th Cong. § 3(8) (2025) (defining “person” to exclude state governments from federal stablecoin requirements).

[3] Morgan Lewis, The GENIUS Act’s Stablecoin Regulatory Scheme Promotes Uniformity But May Fall Short (2025), available at https://www.morganlewis.com/pubs/2025/09/the-genius-acts-stablecoin-regulatory-scheme-promotes-uniformity-but-may-fall-short.

[4] Bloomberg Law, GENIUS Act Revives Civil War-Era Banking Problem for States (2025), available at https://news.bloomberglaw.com/us-law-week/genius-act-revives-civil-war-era-banking-problem-for-states.

[5] Latham & Watkins, The GENIUS Act of 2025: Stablecoin Legislation Adopted in the US, at 3 (2025), available at https://www.lw.com/en/insights/the-genius-act-of-2025-stablecoin-legislation-adopted-in-the-us.

[6] Sidley Austin, The GENIUS Act: A Framework for U.S. Stablecoin Issuance, at 4-5 (2025), available at https://www.sidley.com/en/insights/newsupdates/2025/07/the-genius-act-a-framework-for-us-stablecoin-issuance.

[7] WilmerHale, What the GENIUS Act Means for Payment Stablecoin Issuers, Banks, and Custodians, at 2 (2025), available at https://www.wilmerhale.com/en/insights/client-alerts/20250718-what-the-genius-act-means-for-payment-stablecoin-issuers-banks-and-custodians#:~:text=GENIUS%20prohibits%20the%20issuance%20of,of%20the%20Currency%20(OCC).

[8] Winston & Strawn, Real GENIUS: Landmark U.S. Federal Payment Stablecoin Legislation, at 6 (2025), available at https://www.winston.com/en/blogs-and-podcasts/non-fungible-insights-blockchain-decrypted/real-genius-landmark-us-federal-payment-stablecoin-legislation.

[9] Congressional Research Service, Stablecoin Legislation: An Overview of S. 1582, GENIUS Act of 2025, IN12523, at 2 (May 2025).

[10] Consumer Finance and Fintech Blog, Wyoming’s FRNT and the Legal Gray Areas of State-Issued Stablecoins (2025), available at https://www.consumerfinanceandfintechblog.com/2025/08/wyoming-launches-first-state-issued-stable-token/.

[11] Morgan Lewis, supra note 3.

[12] Bloomberg Law, supra note 4.

[13] WilmerHale, supra note 7.

This post comes to us from David Krause, emeritus associate professor of finance at Marquette University.