GENIUS Act Leaves Digital Dollars Vulnerable to Blockchain Network 'Bank Runs'

The GENIUS Act is a new federal framework for payment stablecoin issuers. It aims to make each token a safer dollar claim, but it may inadvertently leave digital dollars vulnerable to sudden blockchain network 'bank runs.'

A Federal Reserve staff paper models how transaction congestion can destabilize even a perfectly backed digital dollar. The authors removed the problem of bad reserves from their model, instead focusing on the interaction between transaction fees and payment-network effects.

According to the paper, when fees climb far enough, small payments become uneconomic and a token's usefulness can fall. This can turn individual exits into coordinated redemptions, even if the token is fully backed. The study found that congestion can ration access by transfer size, even while the token remains redeemable.

The GENIUS Act requires permitted payment stablecoin issuers to maintain reserves at least one-to-one in specified liquid assets and to implement public redemption procedures. However, it leaves base-layer pricing and capacity outside its explicit stablecoin rules, giving regulators broad authority over an issuer's operational and technological risks.