The passage of the GENIUS Act on July 18, 2025, marks a significant step forward in crypto regulation. However, compliance requirements in the Act essentially lock out global decentralised finance (DeFi) protocols from providing stablecoins in the US.
The Act now regulates stablecoins, the most significant use case for crypto globally. This has the potential to supercharge the issuance of US dollar-denominated (USD) stablecoins by introducing compliance to technology that provides cross-border settlement in seconds, at almost no cost.
However, unless DeFi projects, stablecoin issuers, and even individual ETH holders start preparing now, they won’t survive the GENIUS Act’s 2028 deadline. They will watch as their market share evaporates into Centralised Finance (CeFi).
How the GENIUS Act enforces CeFi
To summarise the Act, compliant stablecoins must only be issued by a “permitted payment stablecoin issuer” (PPSI). This refers to federally or state-licensed institutions, such as banks, credit unions, certain federally regulated non-banks, or state-regulated entities with regulatory regimes “substantially similar” to those of federal banks.
Most importantly, those institutions must be located in the United States, effectively making Eurodollar and other financial institutions non-compliant.
There is a three-year grace period for non-compliant stablecoin issuers, such as Tether, which custodies most of its reserves with Eurodollar institutions, to “reshore” their backing with a qualified bank or other institution in the US.
On July 18, 2028, non-compliant stablecoins, meaning those not backed 1:1 by cash or equivalents in a US institution, may not be offered or sold in the US by digital asset service providers, including exchanges and custodians.
The penalties for non-compliance after the three-year transition period are severe: civil penalties for violation can reach up to $100,000 per day for issuers who are not a PPSI and any entities dealing in non-compliant stablecoins, and up to $1,000,000 (or up to five years in prison) for knowing violations.
While it is likely that Tether can simply reshore its reserves to qualified institutions and become a PPSI during the transition period, there are profound implications for some of the largest algorithmic stablecoin issuers in Ethereum, the largest of which is MakerDAO/Sky Money.
The coming liquidity shift
MakerDAO, now Sky Money, launched in 2017 and, for the first time, enabled early ETH holders to create a collateralised debt position (CDP) using a smart contract. They could also mint a stablecoin, DAI, which had a market capitalisation of $10 billion in 2022 at its peak.
Many early ETH investors were able to borrow the algorithmic stablecoin against their large ETH holdings. It became widely available for trading in USD on Coinbase, Kraken, and other regulated US exchanges.
This provided early Ethereum ICO participants with the ability to finally leverage their vast wealth to purchase large houses, cars, boats, and other real-world assets without selling their ETH or incurring taxable events.
As of late July 2025, there is still over $16 billion of total value in the Sky Money ecosystem. This includes about $3.7 billion of circulating DAI and $7.7 billion of circulating USDS (the upgraded version of DAI).
To put this into perspective, the total value locked (TVL) on the Ethereum mainnet, as measured by DeFi Llama in late July 2025, is $114.84 billion. The value of the entire CDP ecosystem that early ether investors are borrowing against is more than 10% of this amount.
These CDPs are not compliant with the GENIUS Act, as ETH and other digital assets algorithmically back them, and not 1:1 backed by USD in a US bank.
MakerDAO/Sky Money has no path to compliance because they are a European-based company that is decentralised, where users of the protocol custody their own ETH or other backing assets in a smart contract, and are allowed to issue their own DAI or USDS against that CDP.
If they are unable to comply by July 18, 2028, Coinbase, Kraken, and every other US-regulated custodian or exchange, as well as all banks and financial institutions that custody DAI or USDS, will have to delist DAI and USDS or face civil and potentially even criminal penalties.
This won’t just affect DAI; its market cap, which accounts for over 10% of the value in DeFi, will vanish. This potential market impact of this should concern ETH holders.
The capital flight has already begun
Over the next three years, we can expect a significant exodus from the largest early DeFi protocols on Ethereum, including MakerDAO/Sky Money’s USDS and DAI stablecoins.
The smart money has already begun moving capital to Aave, the largest decentralised finance (DeFi) protocol on Ethereum. Aave grew from just over $40 billion in TVL to almost $60 billion in less than two months since June 1, 2025.
While some of these flows represent natural growth, many represent capital flight from non-compliant stablecoin issuers to Aave, allowing early ETH holders to borrow PPSI stablecoins such as USDC and EURC.
Standard & Poor (S&P) gives Sky a B minus (-) credit rating
Not everyone in traditional finance views this regulatory pressure as an immediate death knell for protocols like Sky Money. S&P has issued its first-ever credit rating for a DeFi protocol, giving Sky Money a B- rating.
The rating agency acknowledged the protocol’s “good track record of limited credit losses since 2020” and “modest earnings,” suggesting some institutional confidence in the protocol’s underlying fundamentals.
However, S&P also highlighted several critical weaknesses that align with the GENIUS Act’s threats: “high regulatory risk from uncertainty about regulatory frameworks for decentralised protocols” and a “governance process that is in a period of significant transition.”
This mixed assessment underscores that while Sky Money has demonstrated operational resilience, the regulatory uncertainty created by the GENIUS Act remains a fundamental challenge that even traditional credit agencies recognise as a key risk factor. It will be interesting to see how the coming months and years will impact some of the oldest and most trusted protocols in DeFi.
The GENIUS Act doesn’t regulate DeFi; it’s an ultimatum. In three years, the door will slam shut on any stablecoin issuer that doesn’t play by Washington’s rules. For protocols like MakerDAO/Sky Money, this is an existential threat: billions in collateral and more than 10% of Ethereum’s DeFi value could be forced out of circulation in the US, funnelling liquidity and influence straight into the hands of a few compliant, US-based giants like Coinbase and Circle.
DeFi can’t afford to sit still. The projects that survive will be those that act now—reshoring reserves, creating compliant issuance pathways, or pioneering new forms of decentralised, censorship-resistant collateral that meet regulatory standards without surrendering their principles. Individual ETH holders and whales must also rethink where they borrow, lend, and park their capital before the liquidity crunch begins.
The GENIUS Act draws a line in the sand. Either DeFi adapts and builds for this new reality, or it will watch its market share and mission vanish into CeFi’s hands. The clock is already ticking toward July 18, 2028.
