Crypto Current #81

This week, we examine the landmark regulatory moment reshaping the $244 billion stablecoin ecosystem as Congress advances the GENIUS Act toward final passage. With the Senate's procedural vote clearing 66-32 and bipartisan momentum building, we analyze which protocols stand to benefit most from regulatory clarity, identifying clear winners among both stablecoin issuers and the DeFi infrastructure that supports them. The consolidation dynamics already playing out through Circle's acquisition battle with Coinbase and Ripple reveal how quickly regulatory legitimacy is transforming market structure, creating distinct categories of winners in what may be crypto's most consequential legislative moment.

The crypto market continued its robust performance with Bitcoin extending gains trading to a new all-time high above $111,000 - up 8% for the week - maintaining its position well above the psychologically important $100,000 level. Bitcoin's dominance held steady at 64%. Among top performers, Hyperliquid surged 28% thanks to the trading-focused protocol's exploding open interest, and Aave jumped 20% on Tuesday, up 14% on the week due to further constructive stablecoin legislation. Ethereum posted a modest 2% gain, while the broader market showed mixed signals, with most major altcoins posting modest weekly gains despite the underlying regulatory optimism driving stablecoin-focused protocols.

What's happening in crypto?

Chart of the week

After Moody’s downgraded US debt rating last week, CDS is indicating further weakening. Currently, credit markets are pricing in a 6-notch rating downgrade, and the deterioration of confidence in the dollar is proving to be a tailwind for crypto.

Source: Reuters

The stablecoin regulation moment: Identifying the clear winners

As Congress advances landmark stablecoin legislation, the market is poised for its most significant regulatory shift since the crypto winter began. With the Senate's GENIUS Act passing its procedural vote 66-32 on Monday and the House advancing its parallel STABLE Act, we're witnessing the final legislative push toward a comprehensive regulatory framework that will fundamentally reshape the $244 billion stablecoin ecosystem.

In our March analysis (Crypto Current #73), we highlighted the explosive growth potential of the stablecoin market, noting how traditional finance giants like BlackRock and Fidelity were "reshaping the landscape" with yield-bearing alternatives to zero-yield stablecoins. The anticipated regulatory clarity we identified as a key catalyst has now arrived, validating our thesis that "established players with existing integrations will become even more valuable" as regulation crystallizes.

For institutional investors, this isn't just about regulatory clarity - it's about identifying which protocols and tokens will capture the lion's share of the newly legitimized market. The winners are becoming clear, and they fall into distinct categories based on their positioning for regulatory compliance and institutional adoption.

The legislative landscape: A done deal

Current Status: The Senate GENIUS Act cleared its 60-vote threshold after Democrats and Republicans reached a bipartisan agreement on key amendments addressing anti-money laundering and national security concerns. The House STABLE Act has similarly advanced through committee.

Timeline: President Trump has called for passage by the August 2025 recess, with Treasury Secretary Scott Bessent emphasizing urgency following the initial May setback. Both bills now appear on track for full passage within months.

Key provisions: Both acts establish a framework where stablecoins can only be issued by "permitted payment stablecoin issuers" - either subsidiaries of insured depository institutions, qualified nonbank entities, or state-regulated issuers. The legislation prohibits yield payments on stablecoins while requiring full backing by cash equivalents or short-term Treasuries.

The treasury multiplier effect: White House crypto czar David Sacks argues this legislation could "create trillions of dollars of demand for our Treasuries practically overnight." His logic is compelling: with over $240 billion in stablecoins already existing without regulation, providing legal clarity could unleash exponential growth. Every dollar of new stablecoin issuance translates directly to Treasury demand, as regulated issuers will prefer yield-bearing government securities over non-interest-bearing cash reserves.

Category 1: The issuers - legal tender stablecoin providers

Circle: The compliance leader

Circle has positioned itself as the regulatory gold standard, with USDC representing the institutional-grade approach to stablecoin issuance. The company's early investment in compliance infrastructure and regulatory relationships has created a significant moat, explaining why both Coinbase and Ripple are pursuing acquisitions at $5+ billion valuations despite the company generating only $155 million in net income.

Tether: The incumbent giant

Controlling over 60% of the stablecoin market with $152 billion in circulation, Tether's USDT has achieved network effects that will be difficult to displace. Despite regulatory uncertainties, Tether's global reach and deep exchange integrations provide defensive positioning in the regulated landscape.

Frax: The regulatory insider

Perhaps the most compelling regulatory play comes from Frax, whose founder, Sam Kazemian, has been directly involved in drafting the GENIUS Act itself. This gives the protocol unmatched regulatory alignment:

Legislative involvement: Kazemian's role in drafting stablecoin legislation positions frxUSD as potentially the first compliant payment stablecoin under the GENIUS Act
Full compliance: frxUSD is already fully backed by T-Bills and cash, custodied via BlackRock and Superstate—meeting regulatory requirements before they're even law
Vertical integration: The protocol has evolved into a complete monetary system: frxUSD (stablecoin), FraxNet (banking interface), and Fraxtal (L2 execution layer)
Institutional partnerships: Live integrations with Stripe and Bridge demonstrate real-world adoption ahead of regulatory clarity

With a $333 million fully diluted valuation, Frax's market positioning reflects the broader market's skepticism toward algorithmic stablecoin experiments, despite the protocol's fundamental transformation toward full compliance.

The three-horse race: Despite the proliferation of stablecoin projects, only these three entities appear positioned as serious long-term issuers in the regulated landscape. Circle brings institutional compliance infrastructure, Tether commands dominant market share, while Frax offers regulatory foresight through direct legislative involvement. This oligopoly structure helps explain Circle's premium valuation—scarcity of viable competitors creates premium economics.

Category 2: The infrastructure beneficiaries

Stablecoin issuance isn't necessarily these protocols' core business, but they provide critical infrastructure that benefits from increased stablecoin adoption and legitimacy.

Aave: The lending infrastructure

Aave's 20% surge following Monday's Senate vote signals market recognition of its privileged position. With over $25 billion in Total Value Locked, over 60% of Aave's lending volume consists of major stablecoins. As a decentralized borrowing and lending platform with its own stablecoin (GHO), Aave is well placed to benefit from increased institutional stablecoin adoption.

Morpho: The modular alternative

The modular lending protocol has emerged as Aave's primary competitor, offering more capital-efficient lending markets and customizable risk parameters that appeal to institutional users seeking yield optimization on stablecoin deposits.

Curve: The liquidity infrastructure

Curve remains critical infrastructure for stablecoin-to-stablecoin swaps and liquidity provision, with its stable swap algorithm specifically designed for pegged assets. Regulatory legitimacy should drive more institutional volume through Curve's specialized pools.

Pendle: The yield optimization layer

The yield tokenization protocol allows users to separate and trade the yield component of yield-bearing stablecoins, creating derivative markets that could see significant growth as institutions seek sophisticated yield strategies in the regulated environment.

Category 3: The traditional finance entrants

BlackRock and Fidelity: Selective market entry

The entry of traditional finance giants represents a seismic shift in stablecoin market dynamics. BlackRock's BUIDL has shown explosive 250% weekly growth, while Fidelity is reportedly in advanced testing of its own offering.

Institutional Advantages:

Regulatory relationships: Existing compliance infrastructure and regulatory relationships
Balance sheet strength: Ability to maintain full backing even during market stress
Distribution networks: Access to institutional clients through existing wealth management channels
Technology integration: Seamless integration with traditional finance systems

However, these advantages come with institutional constraints around yield generation and innovative features that may limit adoption in DeFi ecosystems.

Market structure implications

The regulatory clarity is creating distinct categories of winners and losers across the digital asset ecosystem. Infrastructure protocols that facilitate stablecoin activity without direct regulatory exposure appear positioned to benefit from increased institutional adoption. Meanwhile, established stablecoin issuers with compliance head starts may capture the majority of institutional flows, even as innovation continues through decentralized alternatives.

The emergence of traditional finance players like BlackRock and the potential acquisition of Circle by major crypto companies signals a fundamental shift toward institutional-grade infrastructure and away from purely speculative tokens.

Market consolidation: The Circle catalyst

The regulatory moment has triggered immediate M&A activity, with Circle emerging as the prize asset. Both Coinbase and Ripple are reportedly pursuing Circle with valuations exceeding $5 billion, according to Fortune and Bloomberg reports.

The strategic logic: Circle represents more than just market share - it's infrastructure control. USDC is the second-largest stablecoin with deep DeFi integration, making it critical plumbing for the regulated digital dollar economy. For Coinbase, acquiring Circle would secure a revenue stream (they already share USDC reserve income) and eliminate regulatory dependency. For Ripple, it would instantly position RLUSD's smaller rival as the dominant payments-focused stablecoin.

Valuation dynamics: At a $5 billion price tag for Circle's $155 million in net income, buyers are paying 32x earnings - essentially market pricing for a regulated monopoly. With stablecoin market estimates ranging from $1 to $2 trillion, this multiple appears reasonable - particularly if USDC retains its 25% market share.

The timing element: Circle filed for IPO in April but appears increasingly open to acquisition as public market volatility threatens its debut. The regulatory clarity from the GENIUS Act makes strategic buyers more confident in stablecoin economics, driving immediate consolidation pressure.

Source: DeFiLlama

The consolidation thesis

The current proliferation of 200+ stablecoins masks a more fundamental reality: only three entities appear positioned as serious long-term issuers in the regulated landscape.

However, there's one important exception to this consolidation trend: niche stablecoins serving specific trading relationships may persist outside the dominant USD-pegged ecosystem. Just as Saudi Arabia and China have explored settling oil trades in alternative currencies to bypass dollar dominance, certain trading partners may develop bilateral stablecoin arrangements for strategic or regulatory reasons. These specialized use cases could support smaller stablecoin ecosystems, though they're unlikely to achieve mainstream adoption or challenge the major issuers.

The Circle acquisition battle exemplifies the broader consolidation dynamic - rather than compete, major players are buying market position. Regulatory compliance costs, network effects, and institutional preference for established players will drive consolidation around a handful of major stablecoins.

Conclusion: The infrastructure play

The stablecoin regulatory moment represents more than just legislative progress - it's the beginning of crypto's true integration with traditional finance. While much attention focuses on which stablecoins will survive, the real opportunity lies in the infrastructure layer that will process, secure, and facilitate this newly legitimized market.

For institutional investors, the message is clear: position for infrastructure adoption rather than trying to pick specific stablecoin winners. The regulatory clarity we've long awaited is finally arriving, and with it, the next phase of crypto's institutional evolution.

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