Economist: GENIUS Act could lead to bank deposit outflows

A loophole in the GENIUS Act allowing stablecoin intermediaries to pay yield could lead to trillions of dollars in deposit outflows from traditional banks, according to an Oct. 16 op-ed from former Consumer Financial Protection Bureau economist Andrew Nigrinis..Passed in July, the GENIUS Act established a regulatory framework for stablecoins. Under the law, stablecoins must be backed one-for-one by U.S. dollars or other assets deemed low-risk. The bill also defined the status of stablecoins under securities law, and placed issuers under the supervision of the Bank Secrecy Act. The bill banned stablecoin issuers from paying interest, and differentiated between stablecoins and traditional deposits. Nigrinis predicted a yielding stablecoin would cause a 25 percent reduction in deposits at traditional banks. Stablecoin intermediaries allowed to offer yield at the Federal Funds rate would lead to $1.5 trillion in lending capacity, he said, placing one-fifth of outstanding consumer, small business and farm credit, at risk. Nigrinis predicted a non-yielding stablecoin would still cause a 6 percent decline in bank deposits. Nigrinis, who is now an economist at Cambridge, Mass.-based consulting firm Legal Economics, said “wallets and exchanges now routinely offer yield, cash-back or rewards that mirror the federal funds rate. The difference is semantic, not economic, and it has profound implications for credit creation.“That’s because deposits are not the end of the story; they are the raw material that fuels loans to households, small businesses and farms, and those loans are what power economic growth,” Nigrinis said. He sees the largest financial institutions as better able to weather deposit outflows than their smaller peers. While larger banks usually have sufficient deposits to withstand outflows, Nigrinis said community banks’ business models rely more on small business, consumer and agricultural lending. Also, most stablecoin issuers are likely to place reserves at a handful of large custodial banks or directly in Treasuries, Nigrinis added. “Policymakers considering whether intermediaries, wallet providers, exchanges and other platforms can offer yield or rewards on stablecoin balances should consider how much lending capacity would disappear and where there would be a tangible impact,” Nigrinis said. After the GENIUS Act passed, the vast majority of bankers responding to an IntraFi survey said they were concerned that large companies such as Amazon or Walmart would evade bans on offering stablecoins that pay interest. Banking trade groups have also cautioned against potential loopholes in the GENIUS Act. In August, the American Bankers Association, Independent Community Bankers of America and other trade groups called on Congress to repeal what they saw as a loophole allowing state-chartered uninsured depository institutions to undertake money transmission and custody activities nationwide through a subsidiary without receiving approval from each state. “Ignoring state law in this regard invites regulatory arbitrage, allowing certain uninsured depository institutions special privileges to operate across state lines as federally insured banks currently do, but without the panoply of regulatory and supervisory requirements, or limitations on preemption applicable to those institutions,” the groups wrote.