Washington, D.C. – Christopher Appel, Director of Banking Policy at Better Markets, issued the following statement alongside a comment letter noting significant concerns with the Federal Deposit Insurance Corporation’s (FDIC) proposal to bring stablecoins into the mainstream banking system:
“The FDIC’s reckless GENIUS Act proposal would import all the volatility and illicit finance risks of the crypto market into the United States’ federally insured banking system without the strong rules necessary to apply prudent standards to these risky products. Everyday Americans will be left with false confidence that stablecoins can act as a safe substitute for real dollars, and taxpayers—regardless of whether they have stablecoins or even know what crypto is—will be left exposed to the downside if the banking system sustains losses from stablecoins.
“Like the OCC’s stablecoin proposal, the FDIC’s proposed rule relies primarily on supervisory discretion for capital requirements and fails to establish robust reserve diversification and liquidity frameworks to protect stablecoins from destabilizing runs. The clearest proof of what happens when those protections are absent came in March 2023, when Circle’s stablecoin USD Coin broke its dollar peg by up to 13 cents (from $1 to $0.87) after just 8 percent of its reserves were deposited at Silicon Valley Bank. That episode cost the Deposit Insurance Fund—which the FDIC oversees—nearly $17 billion when the agency invoked the systemic risk exception to prevent the resulting contagion from spreading further.
“Under the proposed rule, stablecoin issuers’ instability could then easily spread to the Deposit Insurance Fund, which is meant to backstop the hard-earned deposits of Americans in the event of a bank’s failure and protect taxpayers from footing the bill. That Fund went negative during the 2008 financial crisis, reaching nearly negative $21 billion by 2009. It took nearly a decade to recover from the low, and the fund has never actually reached its own minimum reserve target set by the FDIC. As history has shown, when this Fund is wiped out, all banks—and especially community banks—pay the price through higher assessments, and confidence in the banking system declines.
“As our comment letter recommends—and as we urged in our earlier comment letter on the FDIC’s prior stablecoin proposal—the FDIC must make significant changes to how it will oversee its critical stablecoin responsibilities. The current haphazard approach—combined with severe attrition of staff and expertise at federal banking agencies—creates the precise conditions for a stablecoin-triggered banking panic.”
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Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.org.
