FDIC Proposes No Insurance for Stablecoins Under GENIUS Act Amid Banks’ ‘Deposit Flight’ Fears

The Federal Deposit Insurance Corporation (FDIC) Chair Travis Hill has revealed that his agency is proposing to ban any form of insurance for stablecoins under the GENIUS Act. His statement comes as banks continue to raise concerns about deposit flight risks amid growing adoption of stablecoins.

FDIC Moves To Implement GENIUS Act

In remarks delivered at the American Bankers Association Washington Summit, Hill said the FDIC plans to propose that payment stablecoins subject to the GENIUS Act are ineligible for pass-through insurance. This is in addition to the Act’s provision, which bans deposit insurance for these stablecoins.

The FDIC chair noted that the Act is silent on pass-through insurance for these payment stablecoins. However, he believes that this proposal of making them ineligible for this kind of insurance aligns with the ban on deposit insurance.

Furthermore, Hill alluded to the GENIUS Act provision, which prohibits stablecoin issuers or other parties from representing that their stablecoins are backed by the “full faith and credit of the United States, guaranteed by the United States Government, or subject to Federal deposit insurance or Federal share insurance.” As such, he suggested that these stablecoins should not serve as a means of access to FDIC-insured deposit accounts.

A broad ban on insurance for stablecoins means that stablecoin issuers or holders are not eligible for the up to $250,000 guarantee that the FDIC provides for insured deposits. It is worth noting that this move will also clearly distinguish stablecoins from bank deposits, since the FDIC won’t insure the reserves for these stablecoins.

This proposal also comes as banks continue to raise concerns about deposit flight risk, with customers potentially moving their money into stablecoins. This has also led to a tussle between the crypto industry and banks over the payment of stablecoin rewards, a development that is causing delays for the CLARITY Act.

Plan To Seek Comments On This Proposal

The FDIC plans to seek comments on its proposal to implement a complete ban on insurance for stablecoins in line with the GENIUS Act. He noted that the agency is particularly interested in comments on this aspect of the ban on pass-through insurance for stablecoins and is open to hearing different perspectives on this issue.

He opined that it was better to address this issue through regulation rather than wait until a bank holding stablecoin reserves fails. The FDIC chair noted that different parties may have different expectations on the availability of FDIC insurance if that happens without a clear regulation.

Hill also admitted that it would be difficult to determine the extent to which stablecoin arrangements would qualify for pass-through insurance, if they were eligible. “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,” he said

It is worth noting that other banking regulators have also made plans to implement the GENIUS Act. As CoinGape reported, the OCC has proposed a rule that would prohibit stablecoin yields in line with the Act’s provision.

Meanwhile, Fed Governor Michelle Bowman revealed that they are working with other banking regulators to develop regulations that include capital and liquidity for stablecoin issuers as required by the GENIUS Act.