Key insights
- Proposed FDIC stablecoin rules could expose the Deposit Insurance Fund (DIF) to significant risks from potential bank runs, according to watchdog groups. Allowing stablecoin issuers to hold large reserves at single banks creates concentrated liabilities. Past events like the SVB collapse, which cost the DIF billions, highlight the potential for systemic risk, especially with anticipated growth in stablecoin issuance. If a systemic risk exemption is invoked for a large stablecoin issuer failure, the DIF's liability could exceed previous amounts, posing a threat to financial stability.
Investing.com -- The Federal Deposit Insurance Corp. faces warnings that its proposed stablecoin rules could expose the Deposit Insurance Fund to risks from bank runs, according to banking industry watchdog groups.
The FDIC proposal would allow permitted payment stablecoin issuers to hold up to 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 creates a new concentrated liability for the DIF that the agency has not quantified or disclosed.
The FDIC stated in its April proposal that reserve assets backing digital currencies are not eligible for Deposit Insurance Fund coverage. The proposal sets capital, liquidity and other standards for payment stablecoins. Payment stablecoin holders would not receive pass-through protection if a bank run and failure occurs.
Better Markets referenced the March 2023 collapse of Silicon Valley Bank in its letter. Circle Internet Group Inc. held approximately $3.3 billion in deposits at SVB before the bank failed, with nearly all deposits exceeding the $250,000 FDIC guarantee limit.
The Biden administration applied a systemic-risk exemption to SVB and Signature Bank during the regional banking crisis, which guaranteed all uninsured accounts including Circle’s deposits. The action resulted in a $16.7 billion cost to the Deposit Insurance Fund, Better Markets said.
The advocacy group warned that payment stablecoin issuance is expected to increase following the 2025 GENIUS Act, which mandated the FDIC to write its proposal. This could create concentration risks that exceed those from SVB’s collapse.
Better Markets said if the FDIC invokes the systemic risk exception to protect uninsured reserve depositors in a large payment stablecoin issuer failure, the resulting DIF liability could surpass any previous amount the fund has absorbed.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
AI computing powers are changing the stock market. Investing.com's ProPicks AI includes dozens of winning stock portfolios chosen by our advanced AI. Our flagship Tech Titans strategy doubled the S&P 500 within 18 months, including notable winners like Super Micro Computer (+185%) and AppLovin (+157%). Which stock will be the next to soar?