| Key Points: – GENIUS Act excludes payment stablecoins from FDIC insurance coverage. – FDIC proposal denies pass-through insurance even when reserves held at banks. – Regulators warn issuers against advertising tokens as FDIC insured. |
Payment stablecoins are not FDIC insured under the genius act, and a pending rule would make that explicit. As reported by Bloomberg Law, the agency is drafting a proposal to deny pass-through deposit insurance even when reserves sit at FDIC-insured banks.
The same report notes regulators have warned issuers against advertising their coins as FDIC insured. Officials want clarity before a bank failure creates consumer confusion about what is and is not covered.
What pass-through deposit insurance is and why it won’t apply
Pass-through deposit insurance protects end customers whose funds are pooled in an account at an insured bank, so long as records clearly show each customer’s ownership. It typically covers structures like custodial accounts and certain payment apps. In effect, it “passes through” the bank’s insurance to each underlying customer up to legal limits.
Payment stablecoin holders are not bank depositors; they hold tokens that are economically backed by an issuer’s reserve assets. Those reserves may include bank deposits or cash equivalents, but the token holder’s claim is against the issuer, not the bank. Because the customer relationship is not a deposit at an insured institution, pass-through coverage would not attach to token balances.
According to a Brookings Institution analysis, the GENIUS framework does not make payment stablecoins automatically eligible for deposit insurance or direct access to Federal Reserve payment systems. The analysis also flags stability concerns if issuers hold uninsured bank deposits in their reserves, which could tie stablecoin risk more tightly to the banking sector.
Regulators are moving to codify that boundary in formal rule text. “Payment stablecoins won’t qualify for pass-through deposit insurance,” said Travis Hill, Chairman of the FDIC.
Could affiliate rewards still trigger bank deposit flight?
Some analysts warn that if exchanges or related platforms offer “rewards” or yield on stablecoins, deposits could migrate out of banks at scale; Wired has suggested the sums could reach into the trillions. Others counter that GENIUS’s no-yield rule for issuers and the lack of deposit insurance reduce substitution risk.
In that camp, Federal Reserve Governor Stephen Miran has argued deposit flight is unlikely under the Act’s constraints, as reported by Banking Journal. He points to the combination of a yield prohibition and the absence of federal insurance as limiting factors.
Bank groups seek broad yield bans covering affiliates
Banking trade groups have urged policymakers to interpret GENIUS’s interest prohibition broadly to cover not only issuers but also affiliates and exchanges, as reported by American Banker. They warn that allowing any associated entity to offer yield could spur deposit disintermediation away from banks and into stablecoins.
Crypto firms argue affiliate rewards aren’t issuer yield
Industry firms, including Coinbase, argue the Act bans issuers from paying yield but does not squarely prohibit affiliates from offering rewards. The publication also reports they view broader prohibitions on affiliates as beyond the statute’s intended scope and harmful to innovation.
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