Part I: Executive Summary & Key Takeaways
This memorandum presents a preliminary analysis by LlamaRisk of the recently enacted GENIUS Act (Public Law 119-27) and its applicability to the GHO token as currently designed and implemented. LlamaRisk has prepared this review to assist the Aave community and stakeholders in understanding the regulatory perimeter established by the Act. While this analysis adopts the structure of a legal review for clarity, it is prepared for informational and risk-assessment purposes only and does not constitute legal advice. The primary conclusion of this review is that GHO, in its current form, does not qualify as a “payment stablecoin” under the Act’s statutory definition. This threshold determination is critical, as it places GHO outside the scope of the Act’s primary regulatory regime.
The core reasoning is straightforward: the Act defines a “payment stablecoin” with a two-part test, and GHO fails the second, dispositive prong. A token is a payment stablecoin only if its issuer is both obligated to redeem it for a fixed amount of monetary value and represents—or creates a reasonable expectation—that it will maintain a stable value. For GHO, no legal person—neither the Aave DAO nor any facilitator—undertakes a legal obligation to redeem the token for U.S. dollars or other money at par. GHO’s design fundamentally differs from the cash-reserve redemption framework anticipated by the statute.
Key Consequences of this Status
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Issuer & intermediary prohibitions do not apply: Because GHO is not a “payment stablecoin,” the Act’s prohibitions do not attach. This includes:
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The restriction in Section 3(a) makes it unlawful for anyone other than a “permitted payment stablecoin issuer” to issue a payment stablecoin in the United States.
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The restriction in Section 3(b) prohibits digital asset service providers from offering or selling a payment stablecoin to U.S. persons after a three-year transition period unless a permitted issuer issues it.
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Prudential rules are inapplicable: GHO is not subject to the detailed prudential rulebook in Section 4, which is designed for permitted issuers. This includes requirements for:
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Reserves: The mandate to hold 1:1 reserves in cash, deposits, or short-term government securities does not apply to GHO’s crypto-collateralized model.
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AML/Sanctions: The obligation to implement technical capabilities for blocking, freezing, or otherwise preventing transactions does not apply at an issuer level.
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Interest: The prohibition on paying interest to holders is irrelevant.
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Statutory protections are not conferred: While GHO avoids the Act’s regulatory burdens, it does not benefit from its protections. This includes the powerful bankruptcy priorities for holders of permitted stablecoins (Section 11) and the explicit safe harbors from being classified as a security under certain acts (Section 17).
Recommended Compliance Posture
The most conservative and effective posture for GHO is to preserve its current architecture and ensure communications are precise and consistent with that design. This means continuing to rely on a facilitator-based mint/burn model governed by the Aave DAO, maintaining over-collateralization with crypto assets, and avoiding any feature or statement that could be construed as a redemption right at par in money by a legal person. U.S.-facing materials should describe GHO as a crypto-collateralized token designed to track the U.S. dollar via market mechanisms, explicitly stating it is not a “payment stablecoin” within the meaning of the Act and that there is no issuer-level right of redemption.
Part II: Detailed Legal Analysis
The following sections provide a comprehensive, section-by-section analysis of the GENIUS Act, grounding the conclusions of the executive summary in the specific text of the statute and the technical realities of the GHO protocol.
Section 2: Definitions
The operative hinge in Section 2 is the statutory definition of “payment stablecoin.” The Act makes two conjunctive elements dispositive: first, the token must be a digital asset “that is, or is designed to be, used as a means of payment or settlement,” and second, “the issuer” must both be “obligated to convert, redeem, or repurchase [it] for a fixed amount of monetary value” and represent—or create a reasonable expectation—that the token will maintain a stable value relative to such fixed monetary value. The statute then carves out national currency, deposits (including deposits recorded on distributed ledgers), and securities. Because GHO has no legal person that undertakes redemption in money, it fails the redemption–obligation prong and therefore does not meet the Act’s definition of a payment stablecoin. This conclusion is grounded in the text of §2(22) and the carve-outs immediately following it.
GHO’s issuance mechanics reinforce that outcome. On Ethereum mainnet, GHO is minted and burned by protocol-approved “facilitators” that operate under Aave Governance parameters and bucket limits; there is no issuer-level promise to redeem at par for U.S. dollars or any other “monetary value” as defined by the Act. Aave’s documentation describes a mint-against-collateral model with facilitator caps, not a cash-reserve redemption framework. As a result, no facilitator or the DAO assumes the statutory “issuer” role that Section 2 presupposes for payment stablecoins. Even if one argued a facilitator is an “issuer” in a colloquial sense because it mints tokens, the missing redemption obligation remains dispositive under §2(22)(A)(ii)(I). The facilitator model—contracts approved by Aave Governance with governance-set mint caps—centralizes issuance permissions in code without creating any legal redemption obligation by a person.
The “permitted payment stablecoin issuer” definition in §2(23) confirms that Congress contemplated a conventional legal person subject to prudential approval and supervision. A “permitted” issuer must be a U.S.-formed entity that is either a subsidiary of an insured depository institution approved under §5, an OCC-approved “Federal qualified payment stablecoin issuer,” or a “State qualified payment stablecoin issuer.” No such U.S. entity stands behind GHO’s issuance today, and nothing in GHO’s design substitutes a DAO or smart contract for that statutory category. This matters because many downstream obligations in the Act are keyed to “permitted” issuers; if GHO is not a payment stablecoin at the threshold, those issuer-centric provisions are not reached.
Foreign-issuer concepts in Section 2 do not change the analysis. The statute defines a “foreign payment stablecoin issuer” as a non-U.S. entity issuing a payment stablecoin that can qualify under a reciprocity framework. That pathway presumes an “issuer” and a qualifying redemption regime; it offers no alternative route for a DAO-governed, crypto-collateralized token without a redemption obligation to be treated as a payment stablecoin. Therefore, GHO cannot be shoehorned into the foreign-issuer track by non-U.S. governance participants or non-U.S. facilitators.
For completeness, the GHO Stability Module enables conversions between GHO and governance-approved tokens at policy-set ratios. Its operation is contingent on counterparties first supplying the relevant stablecoin into the module; when inventories are exhausted, the module may be empty and therefore unavailable for conversions. Accordingly, the GSM functions as an on-chain swap mechanism administered via facilitator contracts, not a standing, issuer-level redemption right at par in money.
Two residual interpretive risks merit explicit control, but neither defeats the conclusion. First, GHO materials necessarily communicate that GHO is intended to track the U.S. dollar; however, §2(22) requires that the same “issuer” who is obligated to redeem also makes the stability representation or creates the expectation. Without the redemption obligation, marketing statements about stability cannot satisfy the definition. Second, “issuer” is not separately defined in Section 2; a regulator could test whether any U.S. legal person involved in facilitation or bridging has made an enforceable promise to redeem for money. The present architecture and disclosures avoid such a promise; maintaining that posture is essential to remain outside §2.
Section 3: Issuance and treatment
Section 3 organizes the Act’s “conduct rules” around payment stablecoins. It does three core things: it restricts who may issue a payment stablecoin in the United States, it restricts which intermediaries may offer or sell a payment stablecoin to U.S. persons after a transition period, and it withholds key institutional treatments from any payment stablecoin that a permitted issuer does not issue. Each hinges on threshold status as a “payment stablecoin” under Section 2. Because GHO lacks an issuer with a par-redemption obligation in money, it is not a “payment stablecoin” on the present record; if that conclusion holds, Section 3’s prohibitions and disabilities do not attach to GHO. If, however, a U.S. regulator or court were to characterize GHO as a payment stablecoin notwithstanding its design, the Section 3 consequences would be immediate and material.
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Section 3(a) makes it unlawful for anyone other than a permitted payment stablecoin issuer to issue a payment stablecoin in the United States. For GHO as presently architected, there is no U.S. “issuer” promising redemption in money, and minting occurs via protocol-approved facilitator contracts under Aave DAO governance, with collateralized borrowing rather than fiat reserve issuance. That keeps GHO outside the line of fire of §3(a).
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Section 3(b) prohibits digital asset service providers, beginning three years after enactment, from offering or selling a payment stablecoin to a person in the United States unless a permitted issuer, subject to the foreign-issuer exception in Section 18, issues the coin. The statute was signed on July 18, 2025; absent earlier implementing relief, the offer-and-sale restriction turns on July 18, 2028. If GHO is not a payment stablecoin, §3(b) does not restrict U.S. exchanges, brokers, or custodians that list or custody GHO. The institutional reality, however, is that risk-averse intermediaries may over-comply, declining to treat GHO as a payments instrument to avoid the §3(b) perimeter.
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Section 3(g) is the institutional-treatment lever. It provides that a payment stablecoin not issued by a permitted issuer shall not be treated as cash or cash equivalent for accounting purposes, shall not be eligible as cash or cash-equivalent margin or collateral for FCMs, DCOs, broker-dealers, registered clearing agencies, or swap dealers, and shall not be acceptable as a settlement asset for wholesale payments between banking organizations or by payment infrastructures. If GHO is correctly treated as outside the “payment stablecoin” definition, §3(g) does not apply to it by force of law.
Section 4: Requirements for issuing payment stablecoins
Section 4 is a prudential rulebook for a permitted payment stablecoin issuer. It presumes a legally identifiable U.S. “issuer” that redeems at par in money and can be examined, supervised, and sanctioned. GHO’s design—crypto-collateralized borrowing via DAO-approved “facilitators,” no fiat reserves, and no promise by any person to redeem for money—sits outside that architecture.
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On reserves, Section 4(a)(1)(A) requires fully identifiable, at least 1:1 backing in specified instruments: U.S. currency or balances at a Federal Reserve Bank; demand deposits or insured shares at insured depositories (subject to FDIC/NCUA concentration limits); Treasury bills/notes/bonds with ≤93-day remaining maturity; overnight repos where the issuer is the seller of T-bills ≤93 days; and reverse repos, plus other highly liquid government instruments as a regulator may allow, including tokenized forms of these reserves if compliant with law. GHO holds no such fiat-money reserve portfolio because GHO issuance is a borrow-against-crypto mechanism, not a cash/T-bill reserve model.
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On redemption policy and transparency, a permitted issuer must publicly disclose clear procedures for timely redemption; may impose discretionary limits only by direction of the Fed, OCC, FDIC/NCUA, or a qualified State regulator; must plainly disclose fees; and must publish the monthly composition of reserves (including tenor and custody geography). None of this exists for GHO because any person has no fiat-redemption commitment.
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On rehypothecation and liquidity management, Section 4(a)(2) forbids pledging, rehypothecating, or reusing reserves, with narrow carve-outs for margin on permitted reserve investments, standard custodial services, or creating short-term liquidity to meet redemptions (including selling T-bills into cleared or regulator-approved repos of ≤93 days). Because GHO maintains no fiat reserves, these restrictions are considered inapposite today; they would bite immediately if GHO adopted a reserve model.
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On AML/sanctions and lawful-order compliance, Section 4(a)(5) treats a permitted issuer as a “financial institution” for BSA purposes and requires: an AML program with KYC/CIP, recordkeeping, suspicious-activity monitoring, and—critically—technical capabilities, policies, and procedures to block, freeze, reject, or otherwise prevent impermissible transactions. Section 4(a)(6) also establishes Treasury coordination and obliges an issuer to have the technological capability to comply with lawful orders (including the ability to freeze or block specific coins/accounts). GHO’s model provides no centralized transfer-blocking function, and the DAO cannot certify or execute freezes on demand. Nothing in the GHO token, Aave-facilitator, or FlashMinter documentation reflects an issuer-controlled transfer-blocking or blacklisting capability; these contracts are presented as mint/burn and liquidity primitives, not as compliance controls.
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On interest, Section 4(a)(11) flatly prohibits paying any interest or yield to holders “solely in connection with the holding, use, or retention” of the stablecoin. For GHO as currently implemented, this prohibition does not apply today because GHO holders do not receive issuer-funded yield simply for holding, and any returns that users may earn arise from separate DeFi activities, such as lending GHO or providing liquidity, which are not payments from an issuer “solely in connection with” holding or using GHO. Section 4(a)(11) imposes no current restriction on GHO on that footing.
Section 11: Bankruptcy treatment
The core entitlements in §11(a) give payment-stablecoin holders of a permitted issuer priority, on a ratable basis among themselves, “over the claims of the [issuer] and any other holder of claims” with respect to the required reserve assets. The statute also states that every holder “shall be deemed to hold a claim.” For GHO, there is no statutory reserve pool or issuer insolvency proceeding to which those priorities could attach.
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Section 11(d) amends Bankruptcy Code §507 to address the reserve-deficiency scenario: if the reserve pool cannot satisfy all redemptions, the unsatisfied portion of each holder’s claim against the estate receives priority over all other claims, including administrative expenses—a superpriority that elevates holders above the usual waterfall. This is powerful protection for permitted, cash-backed instruments. It has no direct analogue for GHO because there is no GENIUS reserve mandate and no estate of a “permitted issuer” to claim against.
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Section 11(e) amends Bankruptcy Code §541(b) to exclude required payment stablecoin reserves from the bankruptcy estate, yet simultaneously confirms that the automatic stay still applies to those reserves. Paired with §11(c), the court may authorize distributions for redemptions expedited—targeting a final order within fourteen days—once the issuer attests that reserves are available for ratable distribution to similarly situated holders. GHO has no statutory reserves to exclude, no automatic-stay channel to navigate, and no Chapter 11 redemption pipeline.
Section 11 furnishes robust, holder-first bankruptcy mechanics only for GENIUS-permitted, reserve-backed issuers. GHO’s current model neither benefits from nor is burdened by those provisions. The legal and commercial implications are not that GHO is disadvantaged in bankruptcy, but that GHO’s risk profile remains protocol-centric (collateral quality, liquidation efficacy, governance) rather than issuer-centric.
Sections 17–18: Securities/commodities exclusions; foreign issuers
The practical upshot of Section 17’s drafting is twofold. First, the Act withholds any presumption that non-permitted stable-value tokens are outside the securities or commodities perimeters. It does not deem GHO a security or a commodity; it simply refrains from granting the affirmative exclusions that permitted, redeemable, fiat-backed models receive. Second, by adding a specific exclusion for permitted issuers from the Investment Company Act and Advisers Act frameworks—and from “security” under SIPA—the Act expressly prevents regulated-fund and broker-dealer customer-property constructs from attaching to permitted coins. GHO gains no certainty because a permitted issuer does not issue it.
Section 18 sets out the only path for non-U.S. payment-stablecoin issuers to access the U.S. market through digital asset service providers without running afoul of Section 3’s offer-and-sale restrictions. The conditions are exacting: Treasury must determine that the foreign regime is comparable to GENIUS, with particular emphasis on Section 4’s reserve and redemption requirements; the foreign issuer must register with the Comptroller of the Currency; it must maintain U.S.-held reserves sufficient to meet U.S. customer liquidity demands (absent a reciprocal arrangement); and it must not be domiciled in a sanctioned or primary money-laundering-concern jurisdiction. Those mechanisms presuppose a foreign “issuer” that undertakes par redemption in money and is capable of prudential supervision and OCC registration. Because no foreign person undertakes issuer-level redemption for GHO, Section 18’s reciprocity and registration framework is inapposite.
Part III: Technical Architecture & Its Legal Implications
GHO’s on-chain architecture directly supports the legal analysis above. The following technical facts are dispositive for the GENIUS Act analysis.
Network Topology on Ethereum Mainnet
On Ethereum mainnet, GHO is an ERC-20 implemented under a facilitator architecture: specific contracts, approved by Aave Governance, can mint and burn within governance-set capacity limits. The Aave v3 Ethereum pool is the initial and principal facilitator, and a dedicated FlashMinter exists to enable intra-transaction liquidity and arbitrage; neither facilitator nor the DAO undertakes fiat redemption at par. Aave’s materials expressly frame GHO’s value as programmatically aligned to the U.S. dollar and maintained through market efficiency, not through an issuer redemption right. Those facts are dispositive for GENIUS-Act purposes: absent a legally accountable “issuer” obligated to redeem for a fixed amount of “monetary value,” GHO does not meet the statute’s definition of a “payment stablecoin,” keeping it—and those who interact with it—outside the issuer-licensing and reserve regime keyed to Sections 2 and 3.
Off-Mainnet Circulation
Off-mainnet circulation follows a hub-and-spoke pattern anchored to Ethereum as the canonical ledger. The current cross-chain strategy uses Chainlink CCIP with a lock-and-release pool on Ethereum and burn-and-mint pools on selected destination networks, so that what appears on other chains is a chain-native GHO representation minted against locked mainnet supply. Governance has explicitly adopted this CCIP model through public proposals, and the CCIP directory reflects the live per-chain pool types and token addresses. None of these mechanisms adds a fiat redemption right by any legal person; they extend routing and liquidity while preserving the canonical economic design. Consequently, the same GENIUS-Act outcome applies off-mainnet. Without an identifiable issuer obligated to redeem in money, these representations do not become “payment stablecoins” merely by virtue of being minted on other networks.
Part IV: Recommended Compliance Posture Under the GENIUS Act
The compliance posture for GHO is straightforward: maintain the current crypto-collateralized, facilitator-mint model with no legal person obligated to redeem for money, and ensure U.S.-facing materials are precise. In that posture, GHO may aim to track the U.S. dollar through over-collateralized borrowing and governance. Still, it should not be marketed or represented as a “payment stablecoin” within the meaning of the Act. This stance minimizes the risk that §3(a) and §3(b) attach and avoids the institutional disabilities of §3(g).
US-facing communications should be disciplined and consistent with the code. Materials may describe GHO as a crypto-collateralized, over-collateralized, DAO-governed token designed to track the US dollar by market mechanisms. Still, they should not be marketed or represented as a “payment stablecoin” within the meaning of the Act. Public documentation, SDKs, developer guides, and user interfaces should explicitly state that there is no issuer-level right to redeem GHO for fiat or deposits and that stability is maintained through protocol mechanics and market efficiency rather than redemption. This avoids the §5(e) marketing trap and reduces interpretive risk under §3(b) should counterparties or platforms over-generalize the statute’s offer-and-sale restrictions. Documentation should also state that GSM conversions are inventory-dependent and may be unavailable when modules are empty, reinforcing that the GSM is not a redemption facility and avoiding language that suggests a legal promise to redeem GHO for money.
Disclaimer
This review was independently prepared by LlamaRisk, a DeFi risk service provider funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.
The information provided should not be construed as legal, financial, tax, or professional advice.
This assessment relies exclusively on the public text of the GENIUS Act as posted on Congress.gov and the enrolled public-law materials. For timing, the Act became Public Law 119-27 on July 18, 2025, and takes effect on the earlier of January 18, 2027 (18 months after enactment) or 120 days following issuance of implementing regulations by the primary federal payment stablecoin regulators. This preliminary regulatory compliance review was prepared for analytical purposes in a fast-moving rulemaking environment; it is non-exhaustive and does not constitute legal advice. It should not replace, substitute, or eliminate a formal legal opinion from a licensed U.S. attorney or law firm addressing GHO’s status under the new regime.# LlamaRisk Insights: GHO in the context of Genius Act