Stablecoin users will not benefit from any government guarantee on their money when the new US law is implemented to govern these tokens, Travis Hill, president of the Federal Deposit Insurance Corp., said. (FDIC).
He also said the ban will include protections known as “pass-through insurance” in which financial companies obtain government protections on behalf of their customers.
The GENIUS (Guiding and Establishing National Innovation for U.S. Stablecoins) Act that is currently being implemented by U.S. markets and banking regulators includes a ban on FDIC insurance for holdings of stablecoins, tokens such as Circle’s USDC and Tether’s USDT that are designed to maintain the value of a U.S. dollar. This is intended to distinguish them from bank deposits, which are guaranteed up to $250,000 by the U.S. safety net.
“The FDIC is considering proposing that payment stablecoins subject to the GENIUS Act will not be eligible for pass-through insurance,” Hill told an audience Wednesday at an American Bankers Association summit in Washington. Although he said the GENIUS Act did not explicitly block these relationships, Hill said such a ban appears to follow the intent of the law.
“It is difficult to estimate the extent to which stablecoin agreements would be eligible for pass-through insurance if they were eligible,” he said. “For example, current pass-through insurance rules require that the identity and interests of end customers be verifiable on a regular basis, which is not a common feature of large stablecoin agreements today.”
Even though stablecoins will not benefit from the FDIC insurance that has supported U.S. bank accounts for generations, the law requires that they be fully reserved, so they will be protected by the issuers’ own safety net.
Protect the banks
Treating stablecoin holdings separately from bank deposits is a highly relevant area of regulatory discussion, as the banking industry had halted the crypto industry’s Digital Asset Market Clarity Act’s progress on whether stablecoins could be tied to yield.
Bankers have argued that such an arrangement could poison their relationships with depositors, who are at the heart of the sector’s business model in which deposited funds fuel loans. Analysts at Jefferies even said this week that the stablecoin boom could result in a 3-5% withdrawal of core deposits from banks over the next five years, which would reduce their profits.
But White House crypto adviser Patrick Witt has maintained a drumbeat in posts on the social media platform X that objections to the Clarity Act are unfounded attempts to derail an important bill.
“The CLARITY Act must remain an innovation-friendly piece of legislation,” he said in his final message Tuesday evening. “Attempts to hijack the legislative process and turn it into an anti-competitive bill are shameful.”
Hill addressed the argument that customers can move their money from banks to stablecoins to earn higher rewards, saying that “a customer moving funds from a bank account to a stablecoin generally does not remove the funds from the overall banking system, but doing so would have impacts on the nature and distribution of deposits across the system.”
The FDIC chief also said his agency was considering another position that the GENIUS Act did not address: token deposits. These are bank deposits represented as a programmable token on a blockchain. He suggested that such deposits should likely be considered deposits under the law, “regardless of the technology or recordkeeping used, and that tokenized deposits should therefore be eligible for the same regulatory and deposit insurance treatment as non-tokenized deposits.”
Read more: US FDIC Proposes First US Stablecoin Rule From GENIUS Act
