Stablecoin users will not benefit from any government guarantees on their money when the new US law to regulate these tokens is implemented, said Federal Deposit Insurance Corporation (FDIC) Chairman Travis Hill.
He also said the ban will include protections known as “pass-through insurance” in which financial companies obtain government protections 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 Circle’s USDC and Tether’s USDT that are designed to maintain the value of one US dollar. This is intended to distinguish them from bank deposits, which are guaranteed up to $250,000 by US backing.
“The FDIC plans to propose that payment stablecoins subject to the GENIUS Act be ineligible for transfer insurance,” Hill told an audience Wednesday at an American Bankers Association summit in Washington. Although he said the GENIUS Act did not explicitly block such 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 qualify for transfer insurance if they were eligible,” he said. “For example, current transfer insurance rules require that the identities and interests of end customers be determinable in the regular course, which is not a common feature of large stablecoin deals today.”
While stablecoins won’t get the FDIC insurance that has backed Americans’ bank accounts for generations, they are required by law to be fully confidential, so they will be protected by the issuers’ own safety net.
Protecting the banks
Treating stablecoin holdings differently from bank deposits is a very relevant area of regulatory discussion, because the banking industry had stalled progress on the crypto industry’s Digital Asset Market Clarity Act on whether stablecoins could be associated with performance.
Bankers have argued that such a deal could poison their relationship with depositors, which is the core of that industry’s business model in which deposited funds fuel loans. Analysts at Jefferies even said this week that the stablecoin boom could translate into a core deposit drain of between 3% and 5% over the next five years from banks, which would eat into their profits.
But White House crypto advisor Patrick Witt has maintained the tone in posts on social media platform X that objections to the Clarity Act are baseless attempts to derail an important bill.
“The CLARITY Act must remain a pro-innovation piece of legislation,” he said in his most recent post Tuesday night. “Attempts to hijack the legislative process and turn it into an anti-competition bill are shameful.”
Hill addressed the argument that customers can move their money out of banks and into stablecoins for higher rewards, arguing that “a customer moving funds from a bank account to a stablecoin generally does not withdraw 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 did not address: tokenized 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 record-keeping used, and therefore tokenized deposits should be eligible for the same regulatory and deposit insurance treatment as non-tokenized deposits.”
Read more: US FDIC proposes first US stablecoin rule arising from GENIUS Act
