Stablecoin push into US banking system stirs systemic risk fears
The passage of the Genius Act and a concurrent rollback of enforcement have integrated private stablecoins into the US banking system, drawing in major financial institutions but raising alarms about Treasury market stability and uninsured deposits.
Washington has fundamentally changed its stance on digital assets, passing legislation that embeds private stablecoins into the traditional banking system while dismantling the regulatory framework that previously constrained the industry. The Genius Act, passed with bipartisan support from 206 Republicans and 102 Democrats, allows banks, non-banks, and retailers like Walmart to issue their own dollar-pegged cryptocurrencies.
This legislative push follows a sweeping rollback of federal oversight. The Trump administration halted the Securities and Exchange Commission’s crypto-enforcement program, dropped related lawsuits, and gutted its dedicated oversight unit. The Department of Justice simultaneously pulled back on money laundering investigations targeting crypto platforms.
Financial institutions are responding rapidly to the new landscape. With 233 stablecoins currently on the market, Mastercard is acquiring crypto businesses and accepting stablecoin settlements. JPMorgan and Citi are building proprietary crypto deposit infrastructure to defend their market share against digital upstarts.
For investors, the appeal of stablecoins lies in their yield-generating reserves, typically backed by assets like US Treasury bills. Unlike traditional bank accounts, however, these holdings lack FDIC insurance. Economists warn this creates a structural vulnerability in the financial system.
“Some policymakers may view stablecoins as an up-and-coming financial innovation that does not currently pose any systemic risk and therefore believe that the best strategy is to wait to see how things play out. That would be a terrible mistake,” wrote Yale’s Gary Gorton and Jeffery Zhang from the University of Michigan.
Because issuers must guarantee a fixed $1 value, there is an incentive to stretch reserve requirements by purchasing higher-yielding, riskier assets. “There are always new entities that are going to figure out a way to be outside the regulatory net,” noted Rutgers economist Michael Bordo.
A mass redemption event poses a direct threat to broader markets. “If panicked customers force [issuers of stablecoin] to sell, treasury prices could collapse, sharply increasing interest rates and destabilizing other financial markets and our entire economy,” warned Barry Eichengreen from the University of California, Berkeley.
The regulatory perimeter could shrink further as the administration aggressively pushes for passage of the Clarity Act. This legislation would provide light-touch legal cover for the broader crypto industry to issue and trade more volatile assets like bitcoin.
As stablecoins draw deposits away from commercial banks, the shift may aid Washington in financing its debt by boosting Treasury demand. However, the resulting fragmentation of the payment system into competing, opaque private currencies without a lender of last resort replaces traditional banking risks with a potentially severe systemic threat.
