FDIC Proposes New Stablecoin Regulations Under GENIUS Act

The Federal Deposit Insurance Corporation (FDIC) has made strides toward establishing a supervisory framework intended for the management of stablecoins within U.S. banks and their subsidiaries as part of the GENIUS Act initiative. This proposal signifies a crucial development in the federal regulation of dollar-pegged digital currencies.

On April 7, the FDIC released a proposal outlining the standards for what it terms “permitted payment stablecoin issuers” (PPSIs). These entities are expected to be subsidiaries of banks under FDIC supervision. The guidelines encompass requirements surrounding reserves, liquidity, cybersecurity, capital, redemption practices, and risk management. A 60-day period for public comments on these proposals has been initiated.

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This initiative is rooted in the GENIUS Act, which stands for Guiding and Establishing National Innovation for U.S. Stablecoins Act. This legislation requires federal banking authorities to formulate a cohesive regulatory framework for the issuance of stablecoins across the nation.

One of the core stipulations set forth by the FDIC is that stablecoin issuers maintain a full 1:1 backing of their digital currencies with accepted reserve assets. These reserves must be continually monitored and kept separate from other business operations. Acceptable assets for backing stablecoins include U.S. currency, Federal Reserve Bank balances, and short-term U.S. Treasury securities, among others.

Furthermore, the proposal establishes limits on reserve concentration and restricts exposure levels to counterparties. The FDIC emphasizes that eligible reserve assets should be both highly liquid and of low risk to facilitate redemption during times of financial strain.

The redemption processes are described as critical to this regulatory proposal. Issuers will need to make their redemption policies transparent and are generally expected to fulfill redemption requests within two business days. For substantial withdrawals that exceed 10% of the total issued stablecoins within a day, issuers will be required to inform regulators and may apply for extension.

FDIC Chair Travis Hill indicated that the framework aims to mitigate operational risks and bolster financial stability as the adoption of stablecoins in payment systems grows.

The proposal also mandates specific capital requirements for PPSIs. New issuers will need to secure at least $5 million in capital during their initial three years, with further stipulations possibly arising from supervisory evaluations. An ongoing minimum capital must be primarily composed of common equity tier 1 and additional tier 1 instruments.

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Moreover, issuers must maintain a liquidity buffer sufficient for 12 months of operational expenses, distinct from the reserve requirements for backing stablecoins.

To address cybersecurity and ensure operational resilience, issuers are required to put in place comprehensive systems for managing private keys, monitoring blockchain activity, handling incidents, and undergoing independent audits. Compliance with anti-money laundering and counter-terrorism financing regulations will also necessitate annual certifications.

It’s crucial to note that stablecoins developed under this regulatory framework will not qualify for the usual deposit insurance protections, which typically cover up to $250,000. Reserves at insured institutions will be categorized as corporate deposits held by the issuer rather than individual deposits held by stablecoin consumers. However, any tokenized deposits conforming to the legal definition of a bank deposit will receive the standard deposit insurance coverage, irrespective of the technology employed.

This action by the FDIC continues the efforts initiated under the GENIUS Act and aligns with similar regulatory actions from other banking agencies, including the Office of the Comptroller of the Currency. Following the public comment phase, the proposal will likely be refined before finalization. The GENIUS Act has set a statutory deadline for the completion of this regulatory framework by mid-2026, creating urgency for regulators to finalize their guidelines in the near future.