Stablecoin users will not benefit from any government guarantee of their money once the new US law is implemented to regulate these tokens, the Federal Deposit Insurance Corp. said. (FDIC) Chairman Travis Hill.
He also specified that the ban would include protections known as “pass-through insurance,” where financial firms obtain government protection on behalf of clients.
The Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act, now being implemented by US markets and banking regulators, included a ban on FDIC insurance for holdings of stablecoins, tokens such as Circles USDC and Tethers USDT that are designed to maintain the value of a US dollar. It is intended to distinguish them from bank deposits, which are guaranteed up to $250,000 by the US backstop.
“The FDIC plans to propose that payment stablecoins subject to the GENIUS Act are not eligible for pass-through insurance,” Hill told an American Bankers Association summit in Washington on Wednesday. Although he said the GENIUS Act did not explicitly block those conditions, Hill said such a ban appears to follow the law’s intent.
“It is difficult to assess the extent to which stablecoin arrangements would qualify for pass-through insurance if they were eligible,” he said. “For example, the current pass-through insurance rules require that the identities and interests of end customers be ascertainable in the ordinary course, which is not a common feature of large stablecoin arrangements today.”
Although stablecoins don’t get the FDIC insurance that has supported American bank accounts for generations, the law requires them to be fully reserved, so they will be protected by the issuers’ own safety net.
Protection of banks
Treating stablecoin holdings separately from bank deposits is a highly relevant arena for regulatory discussion because the banking industry had stalled progress with the crypto industry’s Digital Asset Market Clarity Act on whether stablecoins could be linked to returns.
Bankers have argued that such an arrangement could poison their relationship with depositors, which is at the heart of the industry’s business model, where deposits fuel lending. Jefferies analysts even said this week that the stablecoin boom could translate into 3% to 5% core deposit outflows over the next five years from banks, eating into their profits.
But White House crypto adviser Patrick Witt has maintained a drumbeat in posts on social media platform X that the Clarity Act objections are baseless attempts to derail an important bill.
“The CLARITY Act must remain a pro-innovation piece of legislation,” he said in his latest post Tuesday night. “Attempts to hijack the legislative process and turn it into an anti-competitive bill are shameful.”
Addressing the argument that customers may move their money out of banks and into stablecoins to chase higher rewards, Hill argued that “a customer moving funds from a bank account to a stablecoin does not generally remove the funds from the overall banking system, but this would affect the nature and distribution of deposits across the system.”
The FDIC chief also said his agency is weighing another position that the GENIUS Act did not address: tokenized deposits. It is bank deposits represented as a programmable token on a blockchain. He suggested that such deposits are likely to be considered deposits under the law, “regardless of the technology or registration used, and therefore tokenized deposits should be entitled to the same regulatory and deposit insurance treatment as non-tokenized deposits.”
Read more: US FDIC Proposes First US Stablecoin Rule Coming Out of GENIUS Act
