Stablecoins won't get any kind of deposit insurance under GENIUS rules, says FDIC chief

Federal Deposit Insurance Corp. (FDIC) Chairman Travis Hill has made it clear that stablecoin users will not receive government guarantees on their funds once the new U.S. law governing these tokens, the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, is implemented. This ban extends to "pass-through insurance," a mechanism where financial firms secure government protections on behalf of their customers.

Stablecoins Excluded from FDIC Insurance

The GENIUS Act explicitly prohibits FDIC insurance for stablecoin holdings, distinguishing them from traditional bank deposits which are insured up to $250,000. Chairman Hill stated that the FDIC plans to propose that payment stablecoins regulated under the GENIUS Act are ineligible for pass-through insurance. He noted that current pass-through insurance rules require end-customer identities and interests to be ascertainable, which is not typical for most large stablecoin arrangements.

While stablecoins will not have FDIC insurance, the law mandates that they must be fully reserved by their issuers, providing a safety net through the issuers themselves.

Banking Industry Concerns and Regulatory Discussions

The distinction between stablecoin holdings and bank deposits is a significant point of regulatory discussion. The banking industry has expressed concerns that stablecoins offering higher yields could draw deposits away from traditional banks. Analysts from Jefferies have warned that the growth of stablecoins could lead to a 3% to 5% core deposit runoff from banks over the next five years, impacting their profitability.

White House crypto adviser Patrick Witt has countered these concerns, arguing that objections to the related Digital Asset Market Clarity Act are attempts to hinder innovation. He emphasized that the Clarity Act should remain pro-innovation and criticized efforts to turn it into an anti-competition bill.

Chairman Hill acknowledged that while customers moving funds from banks to stablecoins might not remove money from the aggregate banking system, it could affect the distribution of deposits across the system.

Tokenized Deposits Under Consideration

The FDIC is also considering the treatment of tokenized deposits – bank deposits represented as programmable tokens on a blockchain. Hill suggested that these tokenized deposits should likely be treated as regular deposits under the law, regardless of the technology used, and therefore should be eligible for the same regulatory and deposit insurance treatment as non-tokenized deposits.