GENIUS Effects on the Stablecoin Economy

TL;DR

This paper examines how green reserves in stablecoins, driven by recent legislation, create structural vulnerabilities and systemic risks, especially during climate-related shocks, through empirical analysis of high-frequency financial data.

Contribution

It introduces the concept of Climate-Liquidity Nexus and provides empirical evidence on how green reserves impact stablecoin stability and systemic risk.

Findings

Green bonds fulfill ESG mandates but reduce peg insensitivity.

Recovery time for green-backed stablecoins is 5.4 times longer after shocks.

Greenium acts as a volatility multiplier, not a safety buffer.

Abstract

The institutionalization of stablecoins has led to a paradigm shift in reserve management, accelerated by the 2025 Green Energy and National Infrastructure Underpinning Stablecoins (GENIUS) Act. This study investigates the "Climate-Liquidity Nexus," defined as the structural vulnerability arising from the use of environmentally sustainable but secondary-market-thin assets as collateral for high-velocity digital payment instruments. Utilizing a Vector Error Correction Model (VECM) and GARCH(1,1) volatility frameworks on high-frequency data from 2024 to 2026, we demonstrate that the transition toward green reserves introduces significant "Liquidity Hysteresis." My empirical results indicate that while green bonds fulfill ESG regulatory mandates, they compromise the information-insensitivity of the 1.00 USD peg. Following exogenous climate-finance shocks, the recovery half-life of green-backed stablecoins is found to be 5.4 times longer than that of traditional Treasury-backed counterparts. We find that the "Greenium" paid by issuers acts as a volatility multiplier rather than a safety buffer. These findings suggest that the current regulatory trajectory may inadvertently catalyze systemic fragility during physical risk events, necessitating a redesign of liquidity backstop facilities.