Atakan Bakiskan, US economist at Berenberg, argues that while tighter regulation under the GENIUS Act could limit the financial stability risks posed by stablecoins, unresolved loopholes mean they are unlikely to rival bank deposits, disrupt monetary policy, or meaningfully reshape demand for US government debt.
The growing size of the stablecoin market concerns investors, as previous episodes of rapid and uncontrolled financial innovation have not always ended well. Regulations that force most stablecoin issuers to back their coins one-to-one with safe and liquid assets should largely eliminate financial stability risks.
Stablecoins could be a convenient alternative to cash, but the ban on issuers paying interest will make them incomparable to interest-bearing deposits. Therefore, we doubt they will grow popular enough to absorb a meaningful amount of US government debt or significantly disrupt monetary policy by removing deposits from banks.
How smart is the GENIUS Act?
The GENIUS Act alone does not entirely remove the financial stability risks associated with stablecoins.
First, the GENIUS Act allows stablecoin issuers to hold their reserves in insured bank deposits. However, the Federal Deposit Insurance Corporation (FDIC) only insures up to $250,000 per legal entity. This means that even if a stablecoin provider deposits billions of dollars in bank accounts, only $250,000 is covered by federal insurance. The remaining funds remain uninsured. In the event of a bank failure, stablecoin holders could recover far less than if they each held a deposit account at an insured institution.
Second, the Act prevents stablecoin issuers from paying interest to coin holders but does not restrict non-issuer platforms from doing so. This loophole allows stablecoin issuers to offer yields or rewards to holders through payment exchanges. If regulators do not prevent this, more savers could be attracted to stablecoins. A widespread shift of bank deposits into stablecoins could disrupt monetary policy transmission.
Third, the GENIUS Act does not prevent stablecoin providers from participating in the repurchase agreement (repo) market. Providers can use their Treasury securities as collateral to borrow in the repo market. However, if a coin experiences a run, repo lenders have priority claims on the Treasury securities, not the stablecoin holders. In that scenario, the one-to-one peg could fail.
Disruption to monetary policy?
If savers were to switch from bank deposits to stablecoins, banks would lose a cheap source of funding and would find it harder to lend. This could potentially disrupt monetary policy transmission. However, so long as federal regulators close the regulatory gaps outlined above, monetary policy transmission is unlikely to be disrupted.
If stablecoin providers cannot pay interest, holders have little incentive to prefer stablecoins over bank deposits, which do. This would restrict stablecoins’ advantage to facilitating cryptocurrency purchases and cross-border money transfers.
The GENIUS Act also does not prevent banks or central banks from competing by issuing their own stablecoins. Finally, if stablecoin providers receive funds from outside bank deposits such as foreign demand, which is plausible given the US leads this financial innovation and use bank deposits as reserves, this could actually support US bank deposits.
Stablecoins and the neutral rate
The newly appointed Federal Reserve Governor Stephen Miran argued in his November 7 speech that the expanding stablecoin market could lower the neutral rate of interest the rate at which monetary policy is neither expansionary nor restrictive.
In short, as the US leads stablecoin innovation, foreign demand for US assets could rise, recreating a “global savings glut”, in the words of former Federal Reserve Chair Ben Bernanke, and the neutral rate could fall as the supply of loanable funds exceeds demand.
However, one caveat is that foreign demand for US assets is unlikely to rise under US President Donald Trump’s erratic policymaking. This alone could add a sufficient risk premium to US assets to offset any downward pressure on interest rates from stablecoins.
Atakan Bakiskan is a US economist at Berenberg, the oldest private Bank in Germany and one of the most dynamic banks in Europe.
