The Federal Deposit Insurance Corp.'s proposed regulatory framework for payment stablecoins has drawn criticism from industry watchdogs who say it could expose the Deposit Insurance Fund to concentrated risk related to bank runs.
Under the FDIC's April proposal, permitted payment stablecoin issuers could hold as much as 40% of their reserve assets at a single insured bank. Better Markets, a financial regulation advocacy group, said in a letter submitted Tuesday that this arrangement introduces a new, concentrated liability for the DIF that the agency has not quantified or disclosed.
The FDIC's draft rules state explicitly that reserve assets backing digital currencies would not be eligible for coverage from the Deposit Insurance Fund. The proposal lays out capital, liquidity and other standards for payment stablecoins, but also indicates that holders of payment stablecoins would not receive pass-through protection for those reserves if a bank run or failure occurs.
In its letter, Better Markets invoked the March 2023 collapse of Silicon Valley Bank as a cautionary example. The group noted that Circle Internet Group Inc. had about $3.3 billion in deposits at SVB before the bank failed, and that nearly all of those deposits exceeded the $250,000 FDIC insurance limit.
During that regional banking crisis, the Biden administration applied a systemic-risk exemption to SVB and Signature Bank, which resulted in the guarantee of all uninsured accounts, including Circle's deposits. Better Markets said that action imposed a $16.7 billion cost on the Deposit Insurance Fund.
The advocacy group cautioned that issuance of payment stablecoins is expected to grow following the 2025 GENIUS Act, which required the FDIC to draft the proposal. Better Markets warned that increased issuance could create concentration risks that surpass what was seen in the SVB episode.
Better Markets further argued that if a large payment stablecoin issuer were to fail and the FDIC chose to invoke the systemic-risk exception to protect uninsured reserve depositors, the resulting liability to the DIF could exceed any prior amount the fund has absorbed.
Context and implications
- The FDIC's proposal aims to set regulatory standards for payment stablecoins, including capital and liquidity requirements, while excluding reserve assets from DIF coverage.
- Watchdog groups are focused on the potential for concentrated deposits at single banks, and the possibility that stabilizing actions in a crisis could shift large costs onto the DIF.
- Policymakers and market participants will be watching how the FDIC quantifies and addresses concentration risks tied to growing stablecoin issuance following the GENIUS Act.