As the Senate prepares to consider crypto market structure legislation, here are four key things to know about the risks unregulated crypto poses to consumers and the banking system and how a comprehensive approach can solve for these risks while promoting responsible innovation.
Context. Congress is establishing a regulatory framework for crypto through legislation to provide clear rules for the road for consumers and investors and promote regulatory clarity that supports U.S. innovation and leadership on digital assets. This legislation is an opportunity for lawmakers to address any attempt to evade the intent of the GENIUS Act, which, among other things, prohibits stablecoins from paying interest or yield. Other concerns warranting legislative solutions are the illicit finance risks presented by crypto. Addressing attempts to evade the GENIUS Act’s interest prohibition is necessary to accomplish key goals of comprehensive crypto legislation: to safeguard our financial system and provide clarity for consumers.
- Stablecoin growth would likely displace bank deposits and reduce bank credit to the real economy, contrary to false claims by the crypto industry. The precise extent to which stablecoin growth would displace deposits depends on how several policy questions are resolved by Congress and U.S. regulators.
- The risk of significant deposit flight will be exacerbated if stablecoin issuers can indirectly pay interest through affiliates or other third parties. Yield or interest payment agreements between stablecoin issuers and affiliates or exchanges undermine the GENIUS Act’s prohibition regarding payment of interest and yield. The result will be greater deposit flight risk, especially in times of stress, that will undermine banks’ ability to provide credit to consumers and businesses and support economic growth. Some crypto companies style these interest payments as “rewards,” but rewards are just interest by another name. For example, one crypto firm has a revenue-sharing agreement in which it gives interest payments to investors via a different crypto firm.
- Crypto lending and borrowing via DeFi platforms present a risk of loss to consumers and could transmit crypto shocks to the broader financial system. DeFi lending platforms operate like highly levered banks. However, contrary to traditional banks, DeFi platforms do not have deposit insurance or access to a lender of last resort, nor are they held to capital or liquidity requirements or regular examination.
- Despite the GENIUS Act, crypto pathways remain available for drug traffickers, terrorists and other criminals to exploit the U.S. financial system. These illicit actors use unhosted and internationally hosted wallets as well as DeFi platforms to evade detection and access the U.S. financial system.
To learn more, access the resources below:
- Stablecoin Risks: Some Warning Bells
- A Closer Look: Stablecoins’ Effects on Bank Deposits
- Closing the Payment of Interest Loophole for Stablecoins
- Paying Interest on Stablecoins: Setting the Record Straight
- Despite GENIUS Act, Crypto Pathways Remain for Criminals and Terrorists to Exploit U.S. Financial System
