The recently passed GENIUS Act of 2025 creates a new legal framework for licensing and regulating payment stablecoin issuers. The Act is explicit in stating that an insolvent payment stablecoin issuer that is not a subsidiary of a depository institution will be resolved using US bankruptcy law and thus excluded from federal deposit insurance. The Act also sidesteps the issue of a payment stablecoin lender of last resort. But do not be fooled by the laissez faire tone of the legislative language. Payment stablecoins have already been bailed out by the FDIC insurance fund using costly lender of last resort assistance provided by the Federal Reserve.
Stablecoins are a form of digital money that is purchased and traded over the internet. They are designed to maintain a stable values relative to a reference currency like the US dollar by holding dollar-for-dollar reserves invested in high-quality, short-term, liquid, dollar-denominated assets. Stablecoin transactions are processed using a public distributed ledger system where agents called “miners” earn rewards for processing stablecoin transactions.
The GENIUS Act defines payment stablecoins as a digital asset that: (i) are designed to be used as a means of payment; (ii) have an expectation of maintaining a stable monetary value; (iii) are readily redeemable for currency; (iv) are not a national currency; (v) are not a security; (vi) and are not a deposit as defined in the Federal Deposit Insurance Act or the Federal Credit Union Act.
Nonbank entities can issue payment stablecoins under a federal national license if approved by the Office of the Comptroller of the Currency or under a state license if approved by a state regulatory agency. Payment stablecoins can also be issued by subsidiaries of insured depositories. The GENIUS Act specifies: a mandatory minimum 1:1 reserve asset ratio; the assets that qualify as reserve assets; public disclosure and auditing standards; regulatory jurisdictions; that regulators draft specific safety and soundness and anti-money-laundering regulations in a specified timeframe.
Legal firms have offered summaries of the features of the GENIUS Act, and several contend that the Act precludes payment stablecoins from receiving federal deposit insurance benefits.[2] While payment stablecoin values are not explicitly insured by the FDIC, payment stablecoins most definitely have already benefited from FDIC insurance, and nothing in the Act precludes something similar from happening in the future.
In March 2023, the federal government was forced to take emergency measures to bailout the banking system. The crisis occurred when uninsured depositors at SVB and Signature bank withdrew their funds wholesale after recognizing that large unrealized interest rate losses had effectively rendered their banks insolvent.
To stop bank runs from spreading to other banks, the Treasury was forced to issue a blanket insurance fund guarantee for the failed banks’ depositors which included a large deposit from payment stablecoin issuer Circle. Circle reportedly held $3.3 billion of its $40 billion in payment stable coin reserves as uninsured deposits at SVB bank. Without the FDIC’s deposit insurance blanket guarantee, Circle would likely have lost most if not all of its $3.3 billion uninsured deposit.
The decision to insure all deposits created very large FDIC insurance fund losses compared to the losses under FDIC least-cost receivership rules. In fact, the funding needs of SVB receivership alone exceeded the balance in the Deposit Insurance Fund. The Congressional debt ceiling was binding, so the FDIC could not borrow using its line of credit with the Treasury. The FDIC’s failed bank receiverships were forced to use the Fed as lender of last resort.
The SVB and Signature Bank’s FDIC receivership bridge banks borrowed from the Federal Reserve discount window and paid a penalty interest rate of 70 basis points over prevailing Treasury borrowing rates on hundreds of billions of dollars in loans.
In added irony, the FDIC’s massive $16.2 billion insurance fund losses were passed on to large banks through special insurance fund assessments without much if any public discussion. So, under current law, the large banks were required to paid for the costs generated by the Treasury’s decision to provide a blanket guarantee for uninsured depositors in SVB and Signature Bank, an emergency guarantee that almost certainly bailed out Circle and prevented the failure of the second largest US dollar payment stablecoin.
There is nothing in the GENIUS Act that prevents this from happening again in the future. At a minimum, monthly payment stablecoin reserve statements should include not only the total amount of reserves held as bank deposits, but the name and total amount held in each bank. A more comprehensive reform would be to legally subordinate the claims of all payment stablecoin deposits to all other deposits in future FDIC resolutions.
