GW Law Faculty Publications & Other Works

Document Type

Article

Publication Date

2025

Status

Forthcoming

Abstract

On May 21, 2025, the U.S. Senate voted to begin final consideration of the “GENIUS Act.” Despite its lofty title, the bill would create grave threats to our financial system and economy by allowing nonbanks to issue stablecoins without the protections provided by federal deposit insurance and other regulatory safeguards governing FDIC-insured banks. The GENIUS Act would set the stage for future runs on stablecoins triggering systemic financial crises and requiring government bailouts.

The great majority of global stablecoins promise to maintain parity with the U.S. dollar and are functionally equivalent to bank deposits. Stablecoins are mainly used as payment instruments for speculating in crypto-assets with fluctuating values, like Bitcoin and Ethereum, and facilitating unlawful activities.

Despite their promises, stablecoins have been anything but stable. More than 20 stablecoins collapsed between 2016 and 2022, and every leading stablecoin lost its “peg” to the U.S. dollar between 2019 and 2023. Stablecoins (like other uninsured, short-term financial claims) are vulnerable to investor runs whenever investors doubt the ability of issuers to redeem their stablecoins promptly. The GENIUS Act would establish a very weak and inadequate regulatory system for stablecoins, and it would not provide a federally-supervised fund to ensure their repayment.

Advocates claim that nonbank stablecoins will improve our payments system and increase financial inclusion. In fact, nonbank stablecoins operating on public blockchains have not shown any ability to deliver fast, reliable, and inexpensive payment services. Public blockchains suffer from lack of scalability and immutability, which prevent them from providing a feasible technology for ordinary payments and other high-volume financial services. Nonbank stablecoins have not demonstrated any capacity to increase financial inclusion, and the crypto industry’s past dealings with underserved communities have been predatory and exploitative.

To remove the dangers posed by uninsured nonbank stablecoins, Congress should reject the GENIUS Act and pass legislation mandating that all issuers and distributors of stablecoins must be FDIC-insured banks. That mandate would ensure that stablecoins are offered to the public in a safe, well-regulated manner that protects consumers and investors and maintains the stability of our financial system. Congress should encourage a more efficient and inclusive payments system by supporting tokenization of deposits on permissioned distributed ledgers administered by FDIC-insured banks, and by requiring FDIC-insured banks to provide basic, low-cost deposit accounts with online payment services to lower-income individuals and families who live in the banks’ designated service areas and meet minimum qualifications for lawful status and financial responsibility.

The GENIUS Act would allow Big Tech firms and other commercial enterprises to acquire nonbank stablecoin issuers and use stablecoins to enter the banking business and build financial empires. That outcome would undermine our nation’s longstanding policy of separating banking and commerce and create enormous risks. To keep Big Tech giants and other commercial firms out of banking, Congress should reject the GENIUS Act and require all stablecoin providers to be FDIC-insured banks.

The GENIUS Act would permit nonbank stablecoins to become a dangerous new category of “shadow deposits,” thereby creating “Shadow Banking 2.0” (a term coined by Hilary Allen). “Shadow Banking 2.0” would disintermediate FDIC-insured banks by pulling away large amounts of bank deposits, severely impairing the ability of banks to make loans to consumers and Main Street businesses.

The GENIUS Act would also allow nonbank stablecoin issuers to inflate a “Subprime 2.0” crypto bubble by offering crypto derivatives. Crypto derivatives would generate multiple, highly-leveraged bets on volatile crypto-assets with fluctuating values. The resulting pile of speculative bets on crypto-assets would resemble the toxic pyramid of bets on subprime mortgages arranged by large financial institutions during the “Subprime 1.0” credit boom of the early 2000s.

The collapse of “Subprime 1.0” caused the global financial crisis of 2007-09. The crypto bubble produced by “Shadow Banking 2.0” and “Subprime 2.0” would inevitably cause another crypto crash, with damaging spillover effects on traditional financial markets. It is very doubtful whether federal agencies could arrange costly bailouts without risking a crisis in the Treasury bond market and significant depreciation of the U.S. dollar. In addition to the foregoing dangers, the GENIUS Act has many other deeply-flawed provisions, which provide further reasons for Congress to reject the GENIUS Act and require all stablecoin providers to be FDIC-insured banks.

GW Paper Series

2025-33

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