Stablecoin users won’t benefit from any government guarantee of their money when the new U.S. law is implemented to govern these tokens, said Federal Deposit Insurance Corp. (FDIC) Chairman Travis Hill.
He also specified that the ban will include protections known as “pass-through insurance” in which financial firms obtain the government protections on behalf of customers.
The Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act that’s being implemented now by U.S. markets and banking regulators included a ban on FDIC insurance for holdings of stablecoins, the tokens such as Circle’s USDC and Tether’s USDT that are designed to maintain the value of a U.S. dollar. That’s meant to distinguish them from bank deposits, which are guaranteed up to $250,000 by the U.S. backstop.
“The FDIC is planning to propose that payment stablecoins subject to the GENIUS Act are not eligible for pass-through insurance,” Hill told an audience Wednesday at an American Bankers Association summit in Washington. Though he said the GENIUS Act didn’t explicitly block those relationship, Hill said such a prohibition seems to follow the intent of the law.
“It is difficult to estimate the extent to which stablecoin arrangements would qualify for pass-through insurance if they were eligible,” he said. “For example, current pass-through insurance rules require that the identities and interests of end-customers must be ascertainable in the regular course, which is not a common feature of large stablecoin arrangements today.”
While stablecoins won’t get the FDIC insurance that’s buttressed American’s bank accounts for generations, the law mandates that they be fully reserved, so they’ll be protected by the issuers’ own safety net.
Protecting banks
Treating stablecoin holdings distinctly from bank deposits is a highly relevant arena of regulatory discussion, because the banking industry had halted progress on the crypto industry’s Digital Asset Market Clarity Act over whether stablecoins could be associated with yield.
Bankers have argued that such an arrangement could poison their relationship with depositors, which is at the core of that industry’s business model in which deposited funds fuel lending. Jefferies analysts even said this week that the boom in stablecoin could translate into 3% to 5% core deposit runoff 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 the social media platform X that the Clarity Act objections are unfounded attempts to derail an important bill.
“The CLARITY Act must remain a pro-innovation piece of legislation,” he said in his most recent post on Tuesday night. “Attempts to hijack the legislative process and turn it into an anti-competition bill are shameful.”
Hill addressed the argument that customers may move their money out of banks and into stablecoins to chase higher rewards, contending that “a customer moving funds from a bank account into a stablecoin generally does not remove the funds from the aggregate banking system, but this would have impacts on the nature and distribution of deposits across the system.”
The FDIC chief also said his agency is weighing another position that the GENIUS Act didn’t address: tokenized deposits. Those are bank deposits represented as a programmable token on a blockchain. He suggested that such deposits probably need to be considered as deposits under the law, “regardless of the technology or recordkeeping utilized, and thus tokenized deposits should be eligible for the same regulatory and deposit insurance treatment as non-tokenized deposits.”
Read More: U.S. FDIC proposes first U.S. stablecoin rule to emerge from GENIUS Act