Original Title: "How The Genius Act Could Change The Dollar Forever - Sam Kazemian & Stani Kulechov"

Original Text: The Rollup

Translation by: Yuliya, PANews

In the rapidly evolving era of cryptocurrency and blockchain technology, Sam Kazemian, founder of Frax Finance, and Stani Kulechov, founder of Aave, are undoubtedly two leading figures in the stablecoin space. In a recent special conversation with The Rollup, they shared insights on the rapid growth of the stablecoin industry, the innovative journey of their projects, and their views on the upcoming regulatory changes, particularly how stablecoins have become the focus of the industry following the volatility in the crypto market in 2022.

Today, their attention is on the GENIUS Act, a landmark piece of legislation that could elevate stablecoins to legal tender status, fundamentally altering the global landscape of the dollar. This article will delve into Sam and Stani's insights on the stablecoin market, their expectations for the bill, and the prospects of how stablecoins will shape the future financial ecosystem. PANews has provided a written translation of this dialogue.

The Stablecoin Boom and Legislative Winds

Host: The stablecoin industry is currently booming, with multiple versions of legislation advancing in both the House and Senate. Although its market share is only 1.1% of the M1 supply of the dollar, the entire industry seems to believe that "this is just the beginning." As core players in the industry, what are your thoughts on this moment?

Sam Kazemian:

To be honest, I can hardly contain my excitement. Every day I read investment reports and ETF briefings, and without exception, "AI" and "stablecoins" are listed as the two hottest fields in the world today, with no other industry coming close. As the founder of a stablecoin protocol, it feels amazing to see this industry finally understood and accepted by the world.

We spent years researching and building Frax, which started as an experimental "hybrid model" and has now transformed into a "legal digital dollar" route that policymakers are willing to legislate in support of—this leap is monumental.

Stani Kulechov:

I completely understand Sam's feelings. Stablecoins are very intuitive tools, especially in regions experiencing financial turmoil and currency devaluation—such as Argentina, certain African countries, and parts of the Middle East—where the financial stability offered by stablecoins is far more attractive than their local currencies.

But even in Western countries, the value of stablecoins lies not just in their "stability" but in their ability to turn the yield of DeFi into something that mainstream users can understand and use. This is a natural evolution of fintech from "fiat currency → digital currency → on-chain assets." It truly opens up a new paradigm for cross-border value transfer.

Do Stablecoins Threaten the Dollar?

Host: You mentioned the value of stablecoins expanding into markets where good currency is hard to come by, such as Argentina, African countries, and some regions in the Middle East and Asia. Regarding how stablecoins affect the dollar's position in the global monetary system, some believe stablecoins threaten the dollar's dominance, while others argue they actually extend the dollar's global influence. What are your thoughts on this issue?

Sam Kazemian:

I think this completely misunderstands the role of stablecoins. The reality is quite the opposite: stablecoins are an "extension" of the dollar, a global extension of the dollar's influence.

We can look at stablecoins through two historical phases:

• The first phase is the ideal of "decentralized algorithmic stablecoins"—like Terra, which relied purely on market mechanisms for stability and ultimately ended in collapse;

• The second phase is the realistic phase we are now entering: if you are pegged to the USD, then the "perfect" design of a stablecoin is actually to gain recognition from the U.S. government—allowing it to directly acknowledge that your token is "dollars."

This is the revolutionary aspect of the GENIUS Act. It is the first time stablecoins are granted "legal tender status" as dollars, meaning when the U.S. Treasury says, "this compliant token is equivalent to dollars," it can truly be accepted by all banks that receive dollars globally—it is no longer just an "on-chain digital asset," but legally recognized as "dollars."

Stani Kulechov:

The dollar is a simple and effective tool for transaction settlement, and the proliferation of the internet has actually expanded global dollar trade. It is expected that stablecoins will experience a similar situation in the future, as the internet's reach becomes broader. Achieving a more decentralized system will take time and widespread adoption; it is a long-term process. Currently, the scale of technology is reflected in the expansion of existing value.

In the next 2-3 years, stablecoins will become the largest asset class on-chain, and within 5-7 years, security tokens will surpass the total of stablecoins and native crypto assets. Traditional assets being tokenized as RWA (real-world assets) will benefit, mostly priced in dollars, reinforcing the concept of dollar-settled transactions, but this does not necessarily represent the final form of the future financial system. The next 10-15 years will witness a shift in transaction mediums towards new mediums with unique security and interoperability, enhancing liquidity and creating more ecosystem interest, establishing new ways for future stablecoins and transaction value.

Are Security Tokens the Ultimate Form of On-Chain Assets?

Host: Stani, you just mentioned that in the long term, stablecoins are merely a transition, and security tokens will become the largest asset class on-chain, even surpassing stablecoins and native crypto assets. What specific assets are you referring to? What is the logic behind this judgment?

Stani Kulechov:

This is a broad concept; what we commonly refer to as RWA (Real World Assets) actually encompasses security tokens as well. The range can include publicly traded company stocks, private equity, debt instruments (such as government bonds, corporate bonds), and potentially future structured financial products.

Currently, many stablecoin reserves are backed by short-term U.S. Treasury securities, which have already been functioning on-chain. However, as on-chain interest rate tools mature, we will see traditional assets with higher yields and more complex risk tiers also being brought on-chain—which is the backbone of the financial system.

In the past, many high-quality assets had poor liquidity, not because they were unattractive, but due to high entry barriers and limited distribution channels. DeFi provides a globally accessible liquidity network that can liberate these assets from "closed" financial structures, allowing them to be priced and traded directly on-chain. This will reshape the entire capital market structure.

Core Impact of the GENIUS Act: Who Can "Print Dollars"?

Host: Sam, you mentioned conversations with Senator Hagerty and other legislators. Can you talk about what new opportunities the GENIUS Act will open once it takes effect?

Sam Kazemian:

The dollar has multiple definitions in the financial system, with the Federal Reserve categorizing different types of dollar assets through M1, M2, M3, etc. M1 currency refers to money that can be used immediately in the economy, including bank deposits, demand deposits, and money market funds that can be quickly converted to cash. M2 currency forms are riskier, such as dollar-denominated bank debts that are not insured by the FDIC (Federal Deposit Insurance Corporation); these assets are more like investments priced in dollars rather than traditional currency.

Since the 19th century, the issuance of M1-type currency has been an exclusive privilege of federally chartered banks. They can create "immediately available" money, such as demand deposits and money market funds. Now, the GENIUS Act grants this ability to stablecoin issuers, allowing some entities that are not chartered banks to flexibly and innovatively issue M1 currency. This is why some banks seem poised to support this bill now, despite previously opposing it, as they prefer to maintain their monopoly on issuing M1 currency.

The GENIUS Act and payment stablecoins are historically significant because they are the first to allow non-chartered banks to issue M1 currency under strict regulations. These regulations require that stablecoins must be backed by high-security assets, such as money market fund securities, Treasury bills, Federal Reserve reverse repos, and FDIC-insured deposits. Currently, FRXUSD is striving to become the first payment stablecoin chartered entity. This development has not yet been fully priced into the market, but it may gradually be recognized in the coming months as more news about banks issuing legal stablecoins emerges.

Stani Kulechov:

While intuitively, regulatory approval for areas like stablecoins seems reasonable, the key lies in the restrictions these regulations may impose, especially regarding innovation. Before entering DeFi, I also worked in fintech, where P2P lending and crowdfunding platforms were initially very active, but later regulatory frameworks forced many small startups to exit because they could not bear the high compliance costs.

So, the key is that the GENIUS Act must set clear yet inclusive rules. We cannot let excessive caution drive innovators away. Fortunately, there is now a group of very professional legislative representatives in the crypto industry working hard to push this process forward.

Will Multiple Entities Issuing Dollars Compete with Each Other?

Host: Traditional banks like JP Morgan and Citibank are planning to issue their own stablecoins. Will there be competition among stablecoins in the future, or even issues of "dollar inflation"?

Stani Kulechov:

Actually, we do not see this as "competition." In our view, stablecoins are more like "payment channels" or "tracks"—each user chooses the most suitable track based on the scenario, such as USDC, GHO, frxUSD, etc. In the Aave ecosystem, many users hold stablecoins for over six months, indicating that they are not just mediums of exchange but also long-term stores of value.

In Aave V4, we have also designed the "GSM" (GHO Stable Module: an important functional module aimed at ensuring that Aave's native stablecoin GHO maintains 1:1 convertibility with other assets). This allows these stablecoins to be used as underlying collateral, with USDC and USDT already integrated. In the future, Frax could also be included through governance processes, enhancing the overall flexibility and risk resistance of the protocol.

Sam Kazemian:

I completely agree. The digital dollar is a positive-sum game. The global M1 market is worth $20 trillion, while the total market cap of on-chain stablecoins currently only accounts for 1%. This means the penetration rate of the entire industry is still very low.

frxUSD was launched just three months ago and is currently applying for integration into the Aave ecosystem. I believe that more and more compliant stablecoins will join DeFi in the future, making the entire digital dollar system more diverse and robust. Frax's goal is to become the "base digital dollar" in this system.

New Landscape for the Digital Dollar: Frax and Aave

Host: Sam, you recently transitioned Frax from L2 to L1 and even restructured the original governance token FXS. Is this a preemptive layout for the "compliance of stablecoins"?

Sam Kazemian:

Absolutely correct. Our overall architecture has transformed from an "algorithmic stablecoin protocol" to a "digital dollar issuance + settlement network." The original Frax Share (FXS) has been renamed to Frax, becoming the gas and governance token; while frxUSD is a brand new, legally compliant payment stablecoin.

We would like to call this the "correct version of the Libra blueprint." Libra initially attempted to build a globally universal digital currency but failed due to political resistance. Now, with the timing being right and policy support in place, we aim to achieve "compliant issuance of dollars" by implementing stablecoin issuance, cross-chain settlement, and value transfer on the high-performance EVM chain, Fraxtal.

Host: Stani, Aave chose not to launch L1 or L2 but instead built the V4 "Unified Liquidity Architecture." Why did you choose this path?

Stani Kulechov:

Although V4 has not yet launched, the relevant proposal was passed last year, and development is nearing completion. We believe that the types of assets on-chain will become extremely diverse in the future, and the risk curve will also extend. Therefore, V4 introduces the design of "Liquidity Hubs + Spokes." Different asset classes (such as RWA, high-risk DeFi assets, etc.) can be allocated to different "branch markets," while still managing liquidity centrally through the "hub."

This way, the user experience is simplified, capital utilization efficiency is improved, and systemic risks are effectively isolated. We have also introduced a "risk premium mechanism," where high-risk collateral will pay higher interest rates, thereby optimizing the overall borrowing cost structure.

Collaboration Concept between Frax and Aave: Allowing "Digital Dollars" to Directly Participate in DeFi Yields

Sam Kazemian:

Then let me "publicly propose" this. We plan to launch the FraxNet reward program in the Frax fintech app, allowing users holding frxUSD to earn risk-free yields equivalent to U.S. Treasury bonds in non-custodial wallets.

But I want to go further—allow frxUSD holders to directly deposit assets into Aave to earn yields through the real lending market. This would make the combination of "digital dollars + on-chain yields" a reality and position Aave as the first DeFi yield platform interfacing with legal dollars.

Stani Kulechov:

This idea is fantastic and showcases the modularity and composability of Aave V4. We look forward to Frax's assets joining the governance proposal process and are willing to provide relevant support to make this "on-chain dollar yield" a reality.

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