Stability coin compliance may determine institutional winners: Aquanow CEO

Stability coin compliance: A key factor for institutional adoption under the new regulations

Phil Sham, CEO and co-founder of Aquanow, said that as new accounting and regulatory rules in the United States increase standards for redemption, reserves and risk control, the compliance of stablecoins will become a key factor in determining which issuers will win institutional adoption.

Summary of Points

The U.S. Financial Accounting Standards Board (FASB) has proposed clarifying when certain digital assets may meet the definition of cash equivalents. Direct redemption rights may result in different accounting treatments for the same stablecoin under different holding arrangements. The provisions of the GENIUS Act will restrict the U.S. market in stages and allow only licensed issuers to operate. Large issuers may gain a liquidity advantage, but small stablecoins can still compete through specific uses.

FASB Proposal: Clarify the accounting treatment of digital assets

The U.S. Financial Accounting Standards Board issued a proposal on August 18 to clarify how existing definitions of cash equivalents apply to certain digital assets, including some stablecoins. Rather than classifying every stablecoin as cash, the proposal focuses on qualifying assets with specific characteristics, such as price stability, liquidity reserves, and contractual rights that allow holders to redeem cash directly from issuers on demand.

The day before the FASB proposal was released, the U.S. Treasury Department sought public comment on rules to implement Section 3 of the GENIUS Act. Together, these two measures could reduce accounting uncertainty while raising compliance thresholds for issuers seeking institutional adoption in the United States.

Phil Sham, CEO and co-founder of digital asset infrastructure provider Aquanow, said that accounting confirmation may remove a major obstacle faced by financial institutions, but it will not automatically equate stablecoins to bank deposits or other traditional forms of cash holdings in all aspects of an institution's business.

Accounting treatment of stablecoins: Reducing financial operational obstacles

Classification of eligible stablecoins as cash equivalents may make it easier for companies to use them for financial management and payment settlement. The change could also affect how companies present digital assets on their balance sheets and assess their available liquidity.

Sham said the proposal could make it easier for compliant stablecoins to integrate into existing financial workflows. "If the proposal is passed, it could remove significant accounting hurdles and make it easier for eligible stablecoins to integrate into the finance and settlement workflow. "

Accounting treatment only solves part of the issues in the agency approval process. Banks, investment companies and companies still need to evaluate regulatory capital rules, internal risk limits, collateral standards and contractual obligations when considering stablecoins. Many bond agreements and credit arrangements have their own definitions of cash and cash equivalents. Even if a stablecoin meets FASB standards, borrowers may need to obtain approval from lenders before using the asset to meet liquidity covenants or minimum cash requirements.

Institutions also need to evaluate custody arrangements, issuer risk exposure, secondary market liquidity and ability to redeem during periods of market stress. "Companies also need to build confidence in redemption, custody, issuer exposure, operational controls and liquidity under pressure,"Sham said."This may accelerate adoption, but it will not replace traditional cash holdings overnight. "

This difference means that favorable accounting standards, while supporting the use of stablecoins, cannot address all legal, credit and operational concerns related to the asset.

Redemption rights may be more important than the token itself

The FASB's focus on direct, on-demand redemption may lead to different accounting outcomes for institutions holding the same stablecoin. stablecoins are usually interchangeable on the chain, which means that one token unit is interchangeable with another token unit by design. However, the legal rights attached to these units may depend on whether the holder purchases directly from the issuer, holds them through a custodian, or obtains exposure through an exchange account.

Institutions that hold stablecoins through exchanges may have contractual claims against the platform rather than direct claims against the issuer. Sham said this additional counterparty exposure could prevent the asset from meeting the proposed cash equivalent standard. "The same stablecoin can be exchanged on the chain, but its accounting treatment may be different depending on the holder's contractual rights. "

A bankruptcy isolation trust or custody arrangement may produce another result if it legally passes direct redemption rights to the beneficial owner. Sham said the final result will depend on the final accounting standards, agency documentation and the specific terms of the arrangement.

Therefore, this proposal may affect the structural design of institutional stablecoin products. Exchanges and custodians may face pressure to prove that customers have enforceable redemption rights, not just claims against intermediaries. "As a result, accounting qualifications may depend both on how the stablecoin is held and on the asset itself,"Sham said.

GENIUS Act Rules: Raise compliance thresholds

The GENIUS Act adds an independent regulatory test for issuers seeking to enter the U.S. market. Under the implementation framework proposed by the Treasury Department, after January 18, 2027, no individual will normally be allowed to issue payment stablecoins in the United States unless a corresponding federal or state license is obtained. The law also imposes conditions on foreign stablecoins issued in the United States. Foreign issuers need to have the technical capabilities to comply with legal U.S. orders and comply with relevant arrangements between the United States and their home country.

Another restriction will take effect on July 18, 2028. Digital asset service providers will generally no longer be allowed to offer payment stablecoins to U.S. customers unless the stablecoins are issued by licensed issuers.

Sham said formal authorization is only a starting point for institutions that choose among eligible stablecoins. Companies will review the issuer's redemption terms, the quality and concentration of reserves, asset isolation, and independent reporting. They may also study what happens when the issuer or one of its reserve banks fails. "Agencies ask three practical questions: Who owes us dollars, where are the funds kept, and how long can we get the money back under pressure? "

Sham said that a 1:1 reserve statement alone is not enough. Institutional users want evidence that they can continue to redeem at face value, especially as liquidity conditions deteriorate. Factors such as governance, cybersecurity, business continuity, anti-money laundering procedures and sanctions compliance may also affect an issuer's ability to win institutional business.

Compliance may lead to concentration of stablecoin liquidity

Consolidated accounting and licensing requirements may direct more activity to at least a few issuers with existing banking relationships, distribution channels and compliance teams. Large issuers can share regulatory and operating costs among a wider user base. They also benefit from existing exchange integration and deeper liquidity, making their stablecoins easier to use for trading, clearing and collateral.

Sham said these advantages could make it more difficult for new issuers to attract enough liquidity to compete. "Liquidity may be concentrated in the hands of mature issuers because compliance costs, distribution and network effects all tend to be economies of scale. This will make it more difficult for new players to compete, but not impossible. "

Smaller issuers can still build markets by targeting regional payment needs, industry-specific settlements, or markets where the largest dollar-backed tokens are underserved. If users cannot reliably redeem the token, or intermediaries cannot provide the token in the United States, low cost alone may not be enough. Sham said smaller issuers need a sound regulatory foundation, clear redemption terms and an ecosystem ready to support the asset. "Compliance earns the right to compete; while practicality and ecosystem readiness drive actual use. "

The FASB proposal and the GENIUS Act framework are still subject to their respective rulemaking processes. The U.S. Treasury Department said comments on its proposed rules should be submitted within 60 days of publication in the Federal Register. If these rules come into effect largely as proposed, competition in the stablecoin space could shift from a race based mainly on supply, yields and exchange availability to a competition shaped by legal claims, reserve acquisitions and the ability to return dollars in times of crisis.