The US Senator is preparing to pass the Genius Act, a bill that will ultimately set legal rules on how stablecoins are issued and supported.
The law allows the companies behind these dollar-backed tokens to store reserves in the bank, purchase finances, and lend money to the bank, just like bank funds. The key is to regulate the rapidly growing parts of crypto that are beginning to bite traditional banking systems.
The real question is not whether stubcoin will remove money from the bank, and not.
When someone mints a stub coin using actual US dollars, the issuer must put those dollars in the reserves. That money has not been lost. It moves into a bank account, government debt, or short-term lending transaction known as a repurchase agreement.
But here is the change. That money is no longer sitting in a low-risk government insurance account of less than $250,000. Instead, it will be stacked up in large, uninsured accounts that could wipe out a second panic hit, and once stable retail cash becomes the cash of a volatile company. And that cash doesn’t last long when things turn sideways.
Stablecoins puts pressure on deposits and insurance
Analysts at JPMorgan Chase write that Stablecoins are essentially a digital form of money market funds. In their words, “bank deposits are not “destroyed” by such changes, but are simply transferred to other economic agents. ”
The problem is not disappearing, it is exposure. It’s more risky to end the bank. And that’s where it gets messy. Researchers at the European Central Bank have called it clearly:
“Getting deposits from Stablecoin issuers transforms retail deposits that could serve as a stable source of funding for the bank.
That’s what scares regulators. If too many people move their insured deposits to stubcoin, the banks become vulnerable financing structures. And it’s already happened before.
In March 2023, the company’s Circle Internet Group, behind USDC, attempted to move more than $3 billion out of Silicon Valley Bank as it collapsed. However, the transfer was not resolved before FDIC took over. Worse, USDC fell below one dollar on multiple exchanges and lost dollar pegs.
In its public submission, the circle confirmed that the dislocation was terminated only after the regulator had guaranteed all deposits in the SVB.
The biggest banks survive, but the small banks hit
The Circle also said it changes the way it manages reserves and holds a “majority” of its cash along with globally important banks such as Bank of America, JPMorgan, Citigroup and Wells Fargo.
These giants are built for fluidity. Because they already need to hold high quality assets enough to survive a big swing, giving them an edge when Stablecoin issuers start moving billions.
However, no small banks have been built for this reason. If daily savers start using stubcoins for regular spending and short-term savings, small banks feel it first. Their biggest strength, government-insured retail deposits, eat. Their main advantage is their weakness.
And there’s more. At present, several major banks are currently debating the possibility of issuing stable ones. Wall Street Journal Major US banks reported early discussions to launch Stablecoin jointly. It will separate even more power from smaller institutions.
If the same bank, which already controls global finance, starts minting its own crypto-support dollars, they won’t just host the reserves. They control the entire pipeline.
Meanwhile, the ecosystem around Stablecoins is growing. People are beginning to earn returns just to hold these tokens. And now there is the tokenized Treasury market. This means that people can make profits from government debt without touching the bank. It puts more pressure on banks to raise interest rates and digs into their profits.