Trump's GENIUS Act Sparks 6.6 Trillion Dollar Bank Deposit Fears

The recent enactment of the GENIUS Act by President Donald Trump has marked a significant step in the legitimization of stablecoins in the U.S., causing a ripple effect of concern among traditional financial institutions. The primary fear is not the volatility typically associated with cryptocurrencies, but rather the stability of stablecoins themselves. If these digital assets gain widespread adoption, banks could face a substantial outflow of deposits, potentially exceeding $6.6 trillion, according to a Treasury report. This shift is particularly alarming if stablecoin platforms offer returns that compete with traditional bank interest rates, even indirectly.

Programs like Coinbase’s 4.10% reward on USDC have already drawn criticism, with some arguing that they essentially replicate interest-bearing accounts under a different name. Banking groups are now advocating for stricter limits on stablecoin incentives and demanding regulatory parity. There are also concerns that stablecoin issuers might gain access to Federal Reserve tools without facing the same level of oversight. If funds migrate from insured accounts to pooled stablecoin holdings, the broader financial system could be exposed to new liquidity and credit risks.

Despite the pushback, some major banks are exploring the launch of their own stablecoins to avoid falling behind tech firms entering the space. Mastercard, on the other hand, views stablecoins as a tool for streamlining global payments rather than a threat. The new law has highlighted the risks associated with a 1:1 reserve system that lacks real-time auditability, potentially amplifying liquidity risks. This scenario is reminiscent of the 2022 collapse of TerraUSD, an algorithmic stablecoin, which caused widespread panic and highlighted the vulnerabilities in the stablecoin ecosystem. The failure of several U.S. banks in 2023, including Silicon Valley Bank, Signature Bank, and Silvergate Bank, further exacerbated these fears, as it led to the de-pegging of stablecoins like USDC and DAI.

The new law is expected to have far-reaching implications for the global financial and monetary order. It marks a historic milestone in the regulation of stablecoins, which have the potential to reshape the way people conduct financial transactions. However, the lack of real-time auditability in the 1:1 reserve system poses significant risks. This system, which requires stablecoin issuers to hold reserves equal to the value of the coins in circulation, can invite liquidity crises if investors lose confidence in the stability of the coins.

The passage of the legislation has also raised questions about the potential for an economic crisis. While the new law aims to regulate a type of cryptocurrency, it could inadvertently trigger a broader economic downturn if not implemented carefully. The concerns among detractors are valid, as the risks associated with stablecoins, including the possibility of panic runs, could have severe consequences for the financial system. In conclusion, the new law regulating stablecoins in the U.S. has triggered panic among domestic banks due to the potential risks of liquidity crises and panic runs. While stablecoins offer benefits for everyday payments and trading, the lack of real-time auditability in the 1:1 reserve system poses significant challenges. The legislation marks a historic milestone in the regulation of stablecoins, but it also highlights the need for careful implementation to avoid potential economic crises.