FDIC leader states that GENIUS regulations will not provide deposit insurance for stablecoins.

The chairman of the U.S. Federal Deposit Insurance Corporation has made it clear that even pass-through deposit insurance will not be permitted from third-party companies.

The chairman of the Federal Deposit Insurance Corporation specified that stablecoins will not receive deposit insurance under the GENIUS Act. (Jesse Hamilton/CoinDesk)

What to know:

• The chairman of the U.S. Federal Deposit Insurance Corporation presented a proposed regulation that his agency intends to issue, which will clarify that “pass-through” deposit insurance will not be available to stablecoin users.
• Chairman Travis Hill stated that this stance is consistent with the intent of the GENIUS Act, which his agency and other federal financial institutions are currently implementing.

Stablecoin users will not receive any government assurance for their funds once the new U.S. legislation regulating these tokens is put into effect, according to Federal Deposit Insurance Corporation (FDIC) Chairman Travis Hill.

He also indicated that the prohibition will encompass protections referred to as “pass-through insurance,” where financial institutions obtain government protections on behalf of clients.

The Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, which is presently being enforced by U.S. market and banking regulators, includes a prohibition on FDIC insurance for stablecoin holdings, such as Circle’s USDC and Tether’s USDT, which are designed to maintain parity with the U.S. dollar. This provision aims to differentiate them from bank deposits, which are insured up to $250,000 by the U.S. government.

“The FDIC intends to propose that payment stablecoins governed by the GENIUS Act are not qualified for pass-through insurance,” Hill informed an audience on Wednesday during an American Bankers Association summit in Washington. While he noted that the GENIUS Act does not explicitly prohibit such relationships, Hill suggested that such a restriction appears to align with the law’s intent.

“It is challenging to assess the extent to which stablecoin arrangements would meet the criteria for pass-through insurance if they were allowed,” he remarked. “For instance, current pass-through insurance regulations necessitate that the identities and interests of end-customers be identifiable in the normal course, which is not a typical characteristic of large stablecoin arrangements today.”

Although stablecoins will not receive the FDIC insurance that has supported American bank accounts for many years, the law requires that they be fully reserved, thereby ensuring protection through the issuers’ own safeguards.

Protecting banks

Distinguishing stablecoin holdings from bank deposits is a significant topic of regulatory discussion, as the banking sector has stalled progress on the crypto industry’s Digital Asset Market Clarity Act over concerns that stablecoins could be linked to yield.

Bank representatives have argued that such connections could jeopardize their relationships with depositors, which is fundamental to the banking industry’s business model, where deposited funds facilitate lending. Jefferies analysts even remarked this week that the surge in stablecoins could lead to a 3% to 5% decrease in core deposits over the next five years for banks, impacting their profitability.

However, White House crypto advisor Patrick Witt has consistently asserted on the social media platform X that the objections to the Clarity Act are unfounded efforts to obstruct a vital piece of legislation.

“The CLARITY Act must remain a pro-innovation piece of legislation,” he stated in his latest post on Tuesday night. “Efforts to manipulate the legislative process and convert it into an anti-competition bill are disgraceful.”

Hill addressed concerns that customers might transfer their funds from banks to stablecoins in pursuit of better returns, arguing that “a customer moving funds from a bank account into a stablecoin generally does not remove the funds from the overall banking system, but this would alter the nature and distribution of deposits within the system.”

The FDIC chairman also mentioned that his agency is considering another issue not covered by the GENIUS Act: tokenized deposits. These are bank deposits represented as programmable tokens on a blockchain. He suggested that such deposits should likely be regarded as deposits under the law, “regardless of the technology or recordkeeping utilized, and therefore 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