Leadership1 publisher3 min readPublished
Fed's stablecoin proposal gives a capital-short issuer one quarter before it must liquidate
Federal Reserve proposals would require $1 of reserves behind every bank-issued stablecoin dollar and redemption within two business days. Banks considering an issuer would also carry a tiered capital charge that starts at 2% of coins outstanding.
The Board Room · Leadership desk
What happened
- The Federal Reserve on Thursday proposed GENIUS Act rules requiring Fed-supervised issuers to hold at least $1 of permitted reserves behind every $1 of payment stablecoins outstanding.
- Issuers' redemption policies would generally have to promise holders payment within two business days.
- Under the GENIUS Act, the Fed has 120 days to decide a substantially complete bank application, or the application is deemed approved.
- Fed Governor Michael Barr backed the rulemaking but said "universal redemption rights" need to be clear in the final rule.
Compiled by The Board RoomSomething wrong?How this is made
Why it matters
- constraint The buffer above the capital minimum has to be in place before a loss, since an issuer gets only one quarter-end to cure a shortfall before it must wind down.
- decision A bank has to settle its business plan before filing, because a materially altered plan or deteriorating finances could restart the 120-day clock.
- capability Fed silence counts as approval once the 120 days run out, so review of a complete filing has a fixed end date the applicant can plan a launch around.
- exposure Issuers cannot yet price enforcement risk: Barr questioned letting the Fed act only on "significant or systemic" AML deficiencies, and the final threshold sets when supervisors step in.
The proposal treats a reserve shortfall more strictly than a capital one. According to Bitcoin.com's account of the text, an issuer whose backing slips below one-to-one must tell the Fed. It must then liquidate reserves and redeem its tokens, unless it has a plan to restore full backing promptly and the Board directs it to follow that plan [6]. A capital shortfall gets until the end of the following quarter [5]. On reserves, the choice between repair and wind-down belongs to the Board [6].
A board deck will probably show the capital cost as a single rate. The proposal tiers it, from 2% on the first $20 billion of stablecoins outstanding down to 1% on amounts above $50 billion, and lists it alongside other capital requirements [4]. An issuer with $1 billion in circulation would hold $20 million against the stablecoin charge alone, 2% of $1 billion [2]. At $20 billion the same charge comes to $400 million [1]. Neither figure includes the other capital requirements [4].
The reserve list sets what the float can earn. Issuers could hold dollars, Federal Reserve balances, certain bank deposits, Treasury securities with 93 days or less to maturity, qualifying repurchase agreements and eligible investment funds, plus tokenized versions of some of those assets [7]. The reserves must be kept apart from the issuer's other assets [8]. The trade-off is between holder safety and issuer income. Holders get backing close to cash. The issuer earns what cash, deposits and short-dated paper pay, and still carries the capital charge. Bitcoin.com's report points to a second tension: a product built around instant digital settlement would still get a two-business-day regulatory redemption window [9].
Timing matters for a bank deciding this quarter. The Fed has 30 days after receiving an application to say whether it is substantially complete, and the 120-day decision clock starts only after that [11]. A filing judged complete on first review would get its answer within about 150 days of submission [3]. The filing must include a business plan, capital documentation and financial projections for the first three years of operations [10]. A bank that projects thin capital in year one is also projecting how close it will run to the quarter-end liquidation trigger [5][10].
The rules as reported apply to Fed-supervised issuers, and the companion proposal covers insured state member banks seeking approval for subsidiaries that issue payment stablecoins [1][10]. The report does not describe a route for fintechs outside Fed supervision.
The sharpest questions came from inside the Fed. "Stablecoins will only be stable if they can be reliably and promptly redeemed at par in a range of conditions," Governor Michael Barr said on Thursday, citing market stress and trouble at individual issuers [13]. His objections are about redemption rights and the AML threshold [14][16]. He welcomed the reserve limits and the standardized capital requirements [15]. In my view that makes the reserve and capital numbers the safer ones to plan around, though all of it is still at the proposal stage [1]. Barr also asked for public comment on whether the framework handles interest-rate and foreign-currency risks [15].
What to watch
- Whether the final rule keeps the "significant or systemic" AML threshold that Barr questioned.
- Whether comments change the two-business-day redemption window for tokens built around instant settlement, or define "universal redemption rights".
- The first state member bank application, and whether the Fed decides within 120 days or lets it be deemed approved.