How Should Banks Weigh Opportunities in Payment Stablecoins as License Deadline Nears?

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The GENIUS Act is ushering in a federally regulated payment stablecoin industry with a ticking clock for current issuers, while the banking industry is either working on its own response or awaiting implementation to see how the new regime affects their business.

Banks are concerned about the potential of stablecoin issuance to pump deposits out of the banking system, particularly from community financial institutions.

Why this matters: It’s the latest incarnation of the threat of “disintermediation,” one that’s loomed over banks for decade

The Office of the Comptroller of the Currency, in releasing final regulations, bent over backward to indicate that the Trump administration gets the concern. However, it noted that “The effect of stablecoin adoption on community bank deposits remains uncertain, and estimates vary widely. The OCC takes community banks’ funding concerns seriously and is closely monitoring potential deposit outflows as the industry develops.”

A major concern for the banking lobby: Payment of interest, yield or rewards on stablecoins. This is barred by the GENIUS Act, but the final regulation left actual determination of compliance up to OCC on a case-by-case basis.

With finalization of the rules, now reality will begin to come into focus.

A key deadline: The GENIUS Act — Guiding and Establishing National Innovation for U.S. Stablecoins — goes into effect Jan. 18. Its central provisions include setting the types of assets stablecoin issuers can use to peg the value of their coin to the dollar.

Need to Know:

Key federal regulations governing issuance of stablecoins by U.S.-based issuers go into effect Jan. 18 under the GENIUS Act.
The federal framework is seen as intending to both regulate a digital form of U.S. currency and encourage its use.
Questions remain regarding the compliance of some major players in the current U.S. stablecoin arena.
Sometimes the best approach is a blend of agentic AI with other approaches that can be implemented more simply.
Meanwhile, banks of all sizes must weigh the role they will play. Will they go with stablecoins in some fashion? Or veer towards tokenized deposits? Or sit tight, for now?

Beyond the battle for deposits, there is a potential prize for community banks to consider, according to Roman Goldstein, senior director at Klaros Group, who has studied both stablecoins and tokenized deposits, a bank-offered alternative strategy.

“At least $150 billion in stablecoins out there are basically inactive, held by people who buy them to own U.S. dollars when they otherwise wouldn’t be able to,” says Goldstein. “Community banks can offer a better product than a stablecoin. They can offer a deposit token that has all the functionality of a stablecoin plus FDIC insurance.” Stablecoins are explicitly not covered by FDIC and issuers are required to disclose that.

How the Stablecoin Issuer Corps is Shaping Up Under GENIUS

Four U.S.-based nonbank companies currently issue dollar-pegged stablecoins. Other issuers based in other countries not doing business in the U.S. also offer dollar-pegged coins, but are not subject to the new rules.

Banking’s competitive consortium thrust: Meanwhile, a consortium of major banks (as well as other companies), is developing a stablecoin program called Project Faro. The group plans to issue U.S. dollar stablecoins as well as stablecoins pegged to other national fiat currencies. Bloomberg recently reported that nearly two dozen consortium members have committed $270 million to get the project going over the next five years.

On another track, multiple major banks have their own payment tokens as well as tokenized deposit programs.

Per the Jan. 18 effective date, stablecoin issuers that wish to issue or offer the coins in the U.S. must by then be licensed and in compliance with the provisions of the act.

Applicants who have a “pending substantially complete application” with the Comptroller of the Currency by Jan. 18 can request waivers of compliance pending approval, but the waivers are not to exceed a 12-month period. In addition, the regulator has stated that it sees no apparent reason for waivers given that the GENIUS Act passed more than a year ago, and its basic provisions were known. But Goldstein believes OCC has signaled that there will be some flexibility. That is also an open invitation to companies that have been looking at state-level stablecoins to shift to the federal framework.

Key insight: The reserve requirements set by the GENIUS Act are central to the “stable” in stablecoins — and a question mark for some issuers.

How GENIUS Act Reserve Requirements are Stacking Up

In early November, the Bank Policy Institute issued a research note that analyzed the existing reserves of the ten largest U.S. dollar stablecoin issues. A key focus was on the four that currently issue in the U.S.

Under the GENIUS Act, payment stablecoins must be supported by U.S. Treasury securities of less than 93-day maturity, overnight reverse repurchase agreements secured by Treasury securities, and bank deposits, along with some other very liquid assets. The trade association accessed the transparency pages each issuer posts online, giving their reserve holdings, and other data.

Two of the four issuers’ holdings comply with the GENIUS Act, according to the analysis — Circle’s USDC and PayPal’s PYUSD, issued by Paxos. USDC is the largest onshore dollar stablecoin, and USDC and PYUSD represent 26% of tokens outstanding globally.

On the other hand, two other U.S. issuers don’t comply at present: World Liberty Financial’s USD1 and Ripple’s USD. Both are backed in part by money market funds whose holdings include agency debt and Treasury securities of more than 93-days maturity. Those assets don’t meet the rule’s requirements.

The offshore stablecoins and a group of stablecoins backed by cryptocurrency assets also don’t comply with GENIUS.

Reality check: “The majority of dollar stablecoins outstanding — those offered offshore and those backed by crypto assets — remain outside of the new legal framework and hold significantly riskier reserve asset portfolios,” according to the paper.

Why is this an issue? Dollar denominated stablecoins have “de-pegged” before, which was part of the impetus for the GENIUS Act in the first place.

Smaller Banks and Stablecoins: Is There a Fit?

Community banks remain split about getting involved in stablecoins.

According to research released in October by the Conference of State Bank Supervisors, 49% of community bank respondents have no plans to touch the business. On the other hand, 37% said that they plan to participate in stablecoin networks through their core service providers. Another 12% said they would partner with existing issuers.

When asked separately what tech developments would be promising opportunities for their banks in the next five years, 23.1% cited tokenized deposits, just ahead of the 21.2% who cited stablecoins.

Feelings are mixed, as reflected in interview transcripts that CSBS published along with its survey data.

• David Osborn is president and CEO of West Star Bank, a $3.3 billion-assets institution near the Mexico border, in El Paso, Texas. He told CSBS that cross-border payments, a key use case for stablecoins, is a significant issue for banks like his.

“Even if only 10% of customers want to use stablecoins, losing 10% of deposits would be very hard to replace,” said Osborn. “It would take years and years to go find other customers to replace them.”

• Jim Kisch, president and CEO of Passumpsic Bank, a $934.5 million-assets bank in St. Johnsbury, Vt., says disintermediation “is a meaningful possibility” if banks like his don’t have a response to stablecoin availability.

“It’s not practical for us to go it alone and create a Passumpsic coin,” said Kisch. But he finds membership in a consortium of some kind potentially attractive. The bank was a non-transacting member of an early tokenized deposit network, USDF. Kisch says it was a good introduction to that alternative concept and the possibilities of programmable payments.

“Once there is more clarity around tokenized deposits, I expect new product designs will emerge rapidly,” says Kisch.

• James Edwards, CEO of United Bank, a $2.2 billion-assets bank in Zebulon, Ga., says his institution is educating itself on tokenized deposits and working with its vendors to prepare. Key issues include details of deposit insurance coverage and anti-money laundering/Bank Secrecy Act compliance.

“We don’t want to be caught flat-footed if the demand for this technology grows,” says Edwards. “These things can pick up speed quickly.”

• On the other hand, Michael Bilski, chairman and CEO of North American Banking Company, a $1.47 billion-asset bank in Roseville, Minn., explored a stablecoin venture with a fintech, but dropped it when the prospective partner ran out of funds.

Bilski is lukewarm about tokenized deposits. “Tokenized deposits have an anonymity component that may appeal to some people, but I don’t see that being a huge boon at the end of the day,” he said.

Why Tokenized Deposits May Be Your Bank’s Better Option

Klaros Group’s Roman Goldstein thinks tokenized deposits are the better option for smaller banks.

“There are a lot of companies offering stablecoins already,” says Goldstein. Trying to break into stablecoins against players with established brand names and infrastructure may be futile. Goldstein sees community bank involvement in stablecoins as corrosive to net interest margins, tying up funds in sterile form.

Tokenized deposits, he argues, give banks and customers the benefits of blockchain-based transactions, but with the advantage that, until they move, they are deposits the bank can lend. In addition, tokenized deposits can be FDIC-insured, like ordinary deposits. And no reserves, akin to those required of stablecoins, are required.

There is a two-sided regulatory aspect to the stablecoin/tokenized deposit debate.

On one hand, “the stablecoin rules should give community banks a lot of comfort that the regulators have the same expectations for digital forms of money as they do for banks.”

On the other hand, the GENIUS Act was specifically created to encourage stablecoins, to pull a business the Trump administration and others want to see grow under federal oversight.

“There is no government agency promoting the use of deposit tokens the same way they’re promoting stablecoins,” says Goldstein.

There are already private sector efforts to build rails for tokenized deposits, including The Clearing House’s On-Chain Money Initiative. Another is SouthState Bank’s pending Stablecoin Consortium, which is exploring usage of both stablecoins and tokenized deposits.