Fed Stablecoin Proposal Criticized for Ignoring Financial Stability Risks
The Federal Reserve's (Fed) proposal for implementing the GENIUS Act has been met with criticism from Christopher Appel, Director of Banking Policy at Better Markets. The proposal fails to address significant financial stability risks, according to Appel.
In particular, the Fed's stablecoin proposal does not include essential guardrails to protect depositors, banks, and the financial system. While it has a stronger capital framework, this becomes less demanding as issuers grow in size and danger. Furthermore, it omits binding quantitative limits on reserve asset concentrations.
The lack of resolution on step-in risk is also a concern. This was a key amplifier of financial instability during the 2008 crisis. Appel notes that banks will likely feel pressure to rescue affiliated stablecoin issuers, which could trigger rapid withdrawals of bank deposits and sales of reserve assets.