More than a year has passed since the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act created the nation’s first federal regulatory structure for payment stablecoins. Since then, federal banking agencies and the Treasury Department have been writing the rules that will determine how the law operates and what it means for community banks.
The GENIUS Act governs payment stablecoins: digital assets intended to maintain a one-to-one value with the U.S. dollar and function as a means of payment. The law limits issuance to permitted entities and requires issuers to maintain reserves made up of specified liquid assets; provide redemption rights; and meet disclosure, audit, risk management and compliance requirements.
The law addresses some core requirements, but regulators are now developing the specific standards for federal and state oversight, issuer compliance and bank participation in stablecoin issuance, custody and related services. That process is still underway, giving community banks a chance to weigh in before the rules are finalized.
Community banks have a direct stake in developing the regulatory framework for payment stablecoins. The regulations could affect deposits, payments, liquidity and competition across the banking industry, so it is important that community bankers tell regulators how the proposals could affect institutions of different sizes and business models.
Key questions remain
July 18 marked both the first anniversary of President Trump signing the GENIUS Act into law and the statutory deadline for federal regulators to complete their rulemaking. The agencies missed that deadline, and several proposals and final rules were still pending as of mid-August.
ICBA and 44 state banking associations used the anniversary to press federal regulators on the issues that will affect community banks the most throughout implementation. In a July letter, they raised concerns about the pace of the rulemaking, coordination among the agencies and the risk that stablecoins that pay yield could draw deposits away from community banks.
The letter urged regulators to align their rules and close gaps that could allow stablecoin issuers or their affiliates to get around the law’s prohibition on paying yield. It also called for strong capital, liquidity and risk management requirements, and comparable standards for nonbank issuers and their parent companies when they perform bank-like functions.
Risks posed by stablecoin yield
The deposit issue is especially important for community banks. ICBA research estimates that yield-bearing payment stablecoins could drain $1.3 trillion in bank deposits and reduce lending by about $850 billion. Community banks rely on those deposits to fund loans for small businesses, farms, households and rural communities.
Stablecoins that pay yield raise the threat of deposit flight by incentivizing consumers and businesses to move their funds out of loan-making community banks and into stablecoin. In the letter, ICBA asked regulators to prevent issuers and affiliated companies from using rewards, incentives or other arrangements to evade yield restrictions.
As stablecoins become more connected to the banking and payments systems, problems at one issuer could spread well beyond the crypto sector. For these reasons, ICBA and the state associations also urged regulators to address run risk, payment system failures, and contagion between crypto firms and regulated financial institutions.
The Clarity Act raises the stakes
$1.3T
in bank deposits could be drained due to yield-bearing payment stablecoins.
Source: ICBA
The potential loss of deposits and lending described above is also driving ICBA’s position on the Clarity Act, in addition to the GENIUS Act rulemaking.
The Clarity Act would establish federal rules for digital assets and divide oversight between the Securities and Exchange Commission and the Commodity Futures Trading Commission. One of the biggest remaining disputes involves stablecoin yield, interest or rewards. The GENIUS Act prohibits issuers from paying yield or interest, and we’re pressing Congress to extend that prohibition to crypto exchanges and other third parties.
Make your voice heard
Right now, two major questions remain unanswered: When will regulators complete the GENIUS Act rules, and what will Congress do with the Clarity Act? The answers will have lasting implications for banking and payments, making both developments important for community bankers to follow.
To stay engaged, community bankers can stay tuned to ICBA’s NewsWatch Today newsletter and advocacy alerts on further developments with GENIUS Act rulemakings and the Clarity Act in Congress. We’ve encouraged state associations and community bankers to submit comments on several rulemakings, and we expect more opportunities for members to explain how proposed requirements could affect their institutions, customers and communities.
Community bankers can also visit mainstreetovercrypto.com to engage on this issue and leverage ICBA’s Crypto Contrast Campaign. The campaign is a targeted effort aimed at policymakers and other decision-makers shaping digital assets policy, and it has generated more than 5.7 million impressions, 5 million video views and significant media exposure. The campaign equips community bankers with research and advocacy resources, including the Stablecoin Impact Map and other tools designed to help members strengthen their own outreach and engagement with policymakers on this important issue.
Given the seismic potential impact of these policymaking developments, ICBA and community bankers must continue working together to ensure our industry and the local communities we serve are heard loud and clear in Washington.