The U.S. Federal Reserve has put forward reserve and two-day redemption requirements under the GENIUS Act, but collateral rules, liquidation thresholds, and interest rates in DeFi lending can still be changed by governance votes. The risk of lending fully reserved dollars has not gone away. (Previously: Fed advances implementation of the GENIUS Act: stablecoin issuers must hold reserves to guard against risk and redeem within 2 days, or face liquidation) (Background: U.S. OCC moves first to finalize GENIUS Act stablecoin rules: effective 2027/1/18, paths for banks and nonbanks to issue stablecoins settled)   Rules for stablecoin issuers are finally set to take shape. On September 24, the U.S. Federal Reserve proposed two new rules to implement the GENIUS Act, requiring issuers to back tokens with reserve assets and comply with new capital and risk-management standards. The proposal also stipulates that redemptions must be completed within two business days, and that issuers must report the amount of stablecoins in circulation to regulators every month. The timeline is tight: the law will take effect on January 18, 2027, or 120 days after the final rules are issued, whichever comes first. Issuers will finally have a set of rules everyone can understand. Next, we may see more use cases at the national level, such as debt repayment and the cross-border circulation of dollars. But the DeFi lending markets where stablecoins ultimately flow are still a long way from maturity. The problem highlighted by Mike Hathaway and Joseph Quintilian, co-founders of DeFi lending protocol Ajna, is this: in typical on-chain lending markets, prices provided by oracles determine when a loan is liquidated, while token holders can vote to change the entire set of rules—and often do so only after funds have already been lent out. This setup was originally designed to protect users. Curated vaults and standardized price feeds have lowered the barriers that early DeFi posed, and institutions now have a vetted menu of markets to choose from. They need only assess one counterparty, and the language used to describe risk fits the conventions of credit committees. But convenience comes from concentration, and risk sits within that concentration. When the same group of risk managers and the same price source underwrite hundreds of billions of dollars in loans, one bad parameter or a brief price spike can spread across every market that relies on that source, dragging markets with no connection to the original error into liquidation. The article cites examples spanning more than a year. In November 2025, Stream Finance suffered a $93 million loss, and analysts traced around $285 million in potential exposure spread across protocols including Euler, Silo, and Morpho. In February this year, a price feed set through a Moonwell governance vote priced cbETH at around $1.12, when its actual price was about $2,200, leaving around $1.78 million in bad debt. In March, an expired setting in a risk-management tool on Aave caused wstETH to be undervalued by about 2.85%, triggering around $27 million in liquidations. In September, Vesu liquidated 47 positions worth around $3 million because of just two minutes of incorrect price data. Comparison of the amounts involved in four DeFi lending bad-debt and liquidation incidents over the past year (graphic created by BlockTempo) Who can change the terms after funds have been lent? Institutional lenders care about terms. If a governance vote can change collateral rules, liquidation thresholds, or interest rates after a loan has been made, that loan cannot be priced. No credit department can underwrite a contract that could be rewritten by a token vote next week. Oracles managed by external parties can also fail or become unavailable. The article warns that Wall Street will recognize this pattern: the interconnected problem of “too big to fail” is being rebuilt, without the capital buffers the Fed now requires stablecoin issuers to maintain. Regulatory assurances stop at the point of issuance. A dollar fully backed by reserves at issuance can still be lent into a market whose terms can be changed by a vote next week, or priced using a feed that could report incorrect data for two minutes straight. The more bank-like the issuance side becomes, the more visible this gap will be. Ajna’s proposed solution is to make change optional: no oracle; lenders choose the prices at which they are willing to lend; interest rates are determined by a fixed formula in the contract, not by a vote; and once a pool is live, no one can change its rules. The trade-off is that vulnerabilities cannot be patched; users can only choose to migrate to a new version. For institutions, the question “Who can change the terms of this loan after it has been made?” is more important to determining risk than “Which market is safest?” What to watch next: effective date and institutional capital flows The first thing to watch is the timeline. The GENIUS Act is set to take effect on January 18, 2027, and the OCC moved first in October to finalize its own version of the rules. Taken together, the two sets of rules have largely established the contours of compliance costs for issuers. The current draft rules cover reserves, capital, and redemptions, but do not address risks such as oracle failures or governance votes changing loan terms. This means that, in the short term, the market will still have to resolve issues around lending-market rules on its own. The second thing to watch is where the money goes. Once requirements for reserves, capital buffers, and two-day redemptions are in place, the amount of dollar-denominated assets on-chain will only grow, and much of that money will likely first flow into centralized infrastructure such as curated vaults. Whether institutions are willing to give up convenience in exchange for immutable terms will determine the shape of the next generation of lending markets. Compared with the amounts involved in the four incidents since 2025, the cost of mutable terms can now be quantified. Related articles Whales short CRV as Aave spends millions to bail it out? Why do DeFi lending protocols incur bad debt? How did one phishing attack expose DeFi’s conflicting desire to “have it both ways”? Lessons from the Venus attack The viability of liquidation-free lending protocols: Can DeFi have both high yields and flexibility? “The GENIUS Act only protects issuers! DeFi lending terms can still be changed by a vote” was first published on BlockTempo (the most influential blockchain news media).