Stablecoin Yield Controversy Intensifies! FDIC Chair: Stablecoins Not Eligible for Deposit Insurance Protection

FDIC Chair States Stablecoins Not Covered by Deposit Insurance, “GENIUS Act” Clarifies Banking Deposit Boundaries, and Discusses Banning Pass-Through Insurance, Sparking Interest and Regulatory Debates.

FDIC Chair Clarifies Regulatory Stance: Stablecoins Not Included in Deposit Insurance System

The Chairman of the U.S. Federal Deposit Insurance Corporation (FDIC), Travis Hill, recently stated that under the current implementation of the “GENIUS Act,” funds held by stablecoin holders will not be protected by government deposit insurance. This statement has reignited market discussions on stablecoin regulation and revenue models. Hill noted at the American Bankers Association (ABA) Summit in Washington that payment-type stablecoins are legally distinguished from bank deposits, and therefore do not fall under FDIC deposit insurance. Currently, U.S. bank deposits are insured up to $250,000, but stablecoins are not covered by this system.

He also revealed that FDIC is planning to propose new regulations to explicitly prohibit the use of “pass-through insurance” mechanisms for stablecoin arrangements. This mechanism originally allowed financial institutions to obtain deposit insurance on behalf of clients, but it will not apply under stablecoin frameworks.

Hill stated that while the “GENIUS Act” does not explicitly ban stablecoins outright, its legislative intent indicates that stablecoins should not be regarded as extensions of bank deposits, and regulators are inclined toward a restrictive interpretation.

Separating Stablecoins from Bank Deposits to Prevent Market Confusion

The “GENIUS Act” is the first comprehensive regulatory framework for payment-type stablecoins in the U.S. It requires stablecoin issuers to maintain 100% reserves to ensure tokens can be exchanged 1:1 for USD. Despite the full reserve requirement, regulators emphasize that stablecoins and bank deposits have different legal statuses. Hill pointed out that stablecoin reserves are usually held in bank accounts, but deposit insurance only covers the issuing company’s accounts, not the stablecoin holders’ assets.

Allowing pass-through insurance would mean that if a bank fails, FDIC would provide coverage based on each stablecoin holder’s proportion of assets, rather than the insurance limit applied to corporate accounts. Hill explained that such a mechanism would be difficult to implement in large stablecoin networks because regulations require clear identification of all ultimate customers and their holdings. Most current stablecoin structures lack this level of transparency. Therefore, regulators prefer to maintain clear boundaries between stablecoins and bank deposits to prevent market misconceptions that stablecoins are government-insured.

Stablecoin Yields and Competition with Banks Spark Fierce Financial Industry Debate

Another key issue in stablecoin regulation is whether stablecoins should be allowed to offer interest or yields. Banking industry representatives worry that if stablecoins can provide interest, large amounts of capital might shift from bank deposits to stablecoin markets, potentially impacting banks’ lending capacity and deposit base. Some analyses suggest that if the stablecoin market continues to grow, it could lead to a 3% to 5% decline in core bank deposits over the next five years.

Earlier this year, the American Bankers Association proposed regulatory measures to prohibit payment-type stablecoins from offering interest or yields, aiming to prevent them from becoming substitutes for bank deposits. However, some policymakers believe that overly restricting stablecoins could hinder financial innovation.

White House crypto advisor Patrick Witt recently stated on social platforms that relevant regulations should promote innovation and not turn into tools that hinder technological development due to industry competition.

Image source: X/@patrickjwitt White House crypto advisor Patrick Witt states that relevant regulations should promote innovation and not turn into tools that hinder technological development due to industry competition.

Tokenized Deposits as Another Regulatory Topic, Banks May Receive Different Treatment

In addition to stablecoins, regulators are also discussing the legal classification of “tokenized deposits.”

Hill indicated that if banks convert traditional deposits into programmable tokens on the blockchain, they are still fundamentally bank deposits and should be subject to the same regulation and insurance systems. This means that tokenized deposits issued by banks could still be eligible for FDIC deposit insurance, whereas stablecoins are viewed as a different type of digital asset.

The “GENIUS Act” has established a basic regulatory framework for payment-type stablecoins, but detailed rules are still to be developed by FDIC, the Treasury Department, and other agencies. The law is expected to be fully implemented within approximately 18 months after signing. As regulatory policies become clearer, the distinctions between stablecoins, bank deposits, and tokenized assets are becoming key issues in the ongoing transformation of the global financial system.

This content is summarized by Crypto Agent from various sources, reviewed and edited by “Crypto City.” It is still in training and may contain logical biases or inaccuracies. The information is for reference only and should not be considered investment advice.