Key Insights:
- Stablecoin reserves move closer to the Treasury market. The Fed’s proposals could tighten rules around which assets issuers can hold as reserves.
- Capital becomes part of the stablecoin race: Issuers would face capital requirements alongside reserve and redemption rules, potentially reshaping competition.
- The Fed is defining what “stable” means: Public comments will help shape rules covering reserves, issuer approval, and protections for stablecoin holders.
The U.S. Federal Reserve invited input on Sept. 24 regarding two proposals that would create a framework for stablecoins issued by payment stablecoin issuers supervised by the Federal Reserve under the GENIUS Act.
The proposed rules concern, among other items, reserves, capital, risk management, and custody, as well as the approval process for banks seeking to issue stablecoins.
It also put several of the industry’s most important operating rules out for public comment. Additionally, the proposals allow banks, issuers, and other interested parties to comment within 60 days of their publication in the Federal Register.
Stablecoin Rules Focus on the Reserves
The first proposal concerns the contents of the reserves that back stablecoins. The Fed would require Board-supervised payment stablecoin issuers to fully back their stablecoins with permissible reserve assets.
In particular, the central bank identified short-term Treasury bills as assets that would qualify. Apart from short-term Treasury bills, the proposal also covers certain other high-quality, liquid assets.
In other words, the permissible assets that could back the stablecoins would be specified. Moreover, issuers will have to maintain reserves against their notes.
The proposal adds that the Fed would establish standardized capital requirements. These requirements would address credit and operational risks arising from payment stablecoin activities. It would also establish risk management standards.
Thus, the picture that emerges from the document is that reserves, capital, and risk management would be part of the stablecoin regulatory framework.
Banks Issuing Stablecoins Face Special Requirements
The Fed has also proposed a specific process for banks seeking to issue payment stablecoins. According to the second proposal, the process would involve a tailored application from the entity seeking to issue stablecoins.
The application would include a business plan, financial statements, and other items. In addition, the process entails provisions for appeals and judicial review.
Meanwhile, the Fed would propose rules for Board-supervised entities that safeguard the assets of payment stablecoins. The proposal would also clarify what activities related to stablecoins Board-supervised entities could undertake.
In other words, the two proposals touch on two different, but related subjects. One proposal addresses requirements related to the stablecoin itself (assets, reserves, and risk management). Meanwhile, the other addresses a bank’s entry into the space (stablecoin issuance).
Thus, the language used in the proposals suggests that the framework would concern not only the stablecoins but also the entities that support them.
Public Feedback Needed on the Stablecoin Rules
The proposals call for public feedback, which will be considered before the Fed proceeds with the framework. The comment period will be open for 60 days following publication in the Federal Register. Thus, the public will have a chance to comment on the requirements concerning reserves, capital, risk management, custody, and the application process for banks seeking to issue stablecoins.
The timing of the proposals is interesting, as similar issues are being discussed in Europe at the same time. On Sept. 22, The Coin Republic reported that the European Central Bank and the EU national central banks were seeking to reopen the discussion of the 60% deposit requirement for significant stablecoin issuers under the Markets in Crypto Assets (MiCA) regulation.
In particular, the European discussion concerns the implications of reserve structure for commercial bank liquidity. In other words, the European discussion essentially revolves around the same issues as the Federal Reserve proposal.
Meanwhile, the discussion about the reserves backing stablecoins takes place as companies in the sector seek to attract a large customer base of banks. In particular, on Sept. 14, Coinbase CEO Brian Armstrong said community banks could use stablecoins to more effectively compete against larger banks.
According to Coinbase and Moov, they are enabling more than 1,000 community banks to participate in the stablecoin ecosystem. However, the companies did not specify how many banks had adopted the solutions. They also did not state when the banks would begin offering services.
