The U.S. Senate is preparing to pass the GENIUS Act, which will finally set legal rules for stablecoin issuance and collateral, with growing concerns about its impact on the existing banking system.
According to Cryptopolitan on the 15th (local time), the U.S. Senate is preparing to pass the GENIUS Act, which will finally set legal rules for stablecoin issuance and collateral. This law allows companies issuing dollar-based tokens to store reserves in banks, purchase government bonds, or lend money to banks in ways similar to money market funds.
The purpose of this bill is to regulate the rapidly growing cryptocurrency sector that has begun to erode the traditional banking system. The real issue is not whether stablecoins remove money from banks, but what kind of money is left and who ultimately bears the risk.
When someone issues a stablecoin using actual U.S. dollars, the issuer must put those dollars into reserves. That money does not disappear. It moves to bank accounts, government debt, or short-term lending transactions called repurchase agreements.
However, there are changes. The money no longer stays in low-risk government-insured accounts under $250,000. Instead, it accumulates in large uninsured accounts that could disappear in a panic, and stable retail cash becomes volatile corporate cash. And that cash does not stay long when conditions worsen.
JP Morgan Chase analysts wrote that stablecoins are essentially a digital form of money market funds. In their words, "Bank deposits are not 'destroyed' by such changes, but simply transferred to other economic entities."
The problem is not disappearance, but exposure. Banks ultimately bear more risk. And here it gets complicated. European Central Bank researchers clearly pointed this out.
"Collecting deposits from stablecoin issuers converts stable retail deposits that can serve as a stable funding source into volatile deposits that cannot."
This is what frightens regulators. If too many people move insured deposits to stablecoins, banks will have a vulnerable funding structure. And this has already happened.
In March 2023, Circle Internet Group, the company behind USDC, tried to withdraw over $3 billion when Silicon Valley Bank collapsed. However, the transfer was not settled before the FDIC took over, and to make matters worse, USDC dropped below $1 on several exchanges, losing its dollar peg.
In public documents, Circle confirmed that the dislocation ended only after regulators guaranteed all deposits at Silicon Valley Bank.
Circle also stated in its documents that it has changed its reserve management to keep a "substantial majority" of cash in globally systemically important banks, including Bank of America, JP Morgan, Citigroup, and Wells Fargo.
These giant banks are built for liquidity and are already required to hold sufficient high-quality assets to withstand large fluctuations, giving them an advantage when stablecoin issuers move billions of dollars.
However, smaller banks are not built this way. If ordinary savers start using stablecoins for daily expenses and short-term savings, smaller banks will be the first to be hit. Their greatest strength, government-insured retail deposits, will be eroded. Their main advantage becomes a weakness.
And there's more. Some large banks are now discussing the possibility of issuing their own stablecoins. The Wall Street Journal reported that major U.S. banks are in initial discussions to jointly launch a stablecoin. This will take more power from smaller institutions.
If the same banks already dominating global finance begin to issue their own cryptocurrency-based dollars, they will not just be hosting reserves but controlling the entire pipeline.
Meanwhile, the ecosystem around stablecoins is growing. People are beginning to earn income just by holding these tokens. And now there is a tokenized government bond market where people can earn returns on government debt without touching banks. This puts even more pressure on banks to raise interest rates, which erodes their profits.
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