The US Senate is approaching the passage of the GENIUS Act, which will establish legal frameworks for stablecoins and their backing. This law will allow companies to store reserves in banks and engage with financial instruments.
GENIUS Act and Its Objectives
The GENIUS Act will regulate how stablecoins pegged to the dollar should be issued and backed. The law will allow companies to store reserves, buy Treasury bonds, or lend to banks like money market funds do. The primary aim is to regulate a rapidly growing part of cryptocurrency that is beginning to impact the traditional banking system.
Risks Associated with Stablecoins
JPMorgan Chase analysts highlight that stablecoins are essentially a digital form of money market funds. They note that "bank deposits are not 'destroyed' by such a change, but are simply transferred to other economic agents." This raises concerns among regulators, as if too many people shift insured deposits into stablecoins, banks risk becoming fragile.
The Future of Banking and Stablecoins
In a recent filing, Circle noted that it changed its reserve management approach, holding a significant majority of its cash with globally systemically important banks such as Bank of America and JPMorgan. While major banks can adapt to this shift, smaller banks may face serious issues if everyday savers begin to use stablecoins for regular transactions.
The GENIUS Act may significantly alter the stablecoin market and its influence on the banking system. Considering the potential risks for the smaller banking sector, this legislation raises questions about the future of stablecoins and their impact on traditional financial institutions.
