- The U.S. GENIUS Act on stablecoins has raised concerns about the safety and redemption process of stablecoins held at banks.
- A proposal suggests that if a bank fails, stablecoin issuers’ claims for insurance should be paid after all other depositors.
- The 2023 collapse of Silicon Valley Bank led to Circle’s USDC stablecoin losing its peg, affecting retail access to redemptions.
- European and other jurisdictions require direct redemption for stablecoins, unlike the U.S., which may increase risk during crises.
- Research shows easier and cheaper redemption can lead to higher risk of large-scale withdrawals, creating a trade-off between price and financial stability.
The recently passed GENIUS Act in the United States has sparked widespread discussion about the regulation of stablecoins. Policymakers and financial experts are examining how stablecoins respond during financial crises and what protections are in place for holders.
When Silicon Valley Bank collapsed in 2023, the stablecoin USDC, managed by Circle, had $3.3 billion uninsured at the bank. This caused the value of USDC, normally pegged to $1, to drop to as low as $0.875 before a government rescue stabilized the situation. According to Paul Kupiec from the American Enterprise Institute (AEI), the U.S. Treasury’s emergency guarantee helped Circle avoid greater losses, but it also meant large banks ended up contributing $16.2 billion to replenish the Federal Deposit Insurance Corporation (FDIC) funds used in the bailout, as detailed in this analysis.
Kupiec suggested that FDIC rules should change so that if a bank holding stablecoins fails, claims from stablecoin issuers are paid only after other depositors. “An emergency guarantee almost certainly bailed out Circle and prevented the failure of the second largest U.S. dollar payment stablecoin,” he wrote.
During the USDC de-pegging crisis, redemptions were mostly available to institutional clients, not retail holders. An MIT Digital Currency Initiative post pointed out that Circle redeemed about $2 billion U.S. dollars in stablecoins during the event. The report noted, “The primary market peg presumably held for institutional clients, even as the secondary market peg for retail users broke.” This highlights an inequality in access to stablecoin redemptions between large institutional and retail investors.
Unlike the U.S., the European Union and jurisdictions such as Hong Kong, Singapore, and the UAE require stablecoin issuers to allow all holders to directly redeem their stablecoins for cash. UK regulators are considering similar rules but may permit delays during crises. This difference means European holders might have better access to redemption than those in the U.S., especially during times of financial stress.
A 2024 study by the National Bureau of Economic Research (NBER) found that easy and cheap redemptions—features viewed as fair—can increase the risk of rapid withdrawals, also known as “runs.” The study also observed that while more access to redemption through multiple intermediaries, as with USDC, may stabilize prices in normal times, it can heighten instability during a crisis.
Experts note that these rules and features create a balance between keeping stablecoin prices steady and avoiding sudden mass withdrawals that can threaten the broader financial system.
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