Professor Arthur E. Wilmarth Jr. of the George Washington University, believes that the US Senate’s GENIUS stablecoin Bill contradicts its name and would “create a dangerously weak regulatory regime for stablecoins.” The law professor wrote an article on the topic in American Banker, and a longer policy brief. While some of his recommendations are controversial, he provides food for thought.
One of his major concerns is that a run on a large stablecoin is almost inevitable at some point in the future. Given stablecoins will, in his view, be weakly regulated, he sees risks in the potential knock on effect on the financial sector and financial stability.
In the past, during crises the federal government has provided blanket guarantees for uninsured bank deposits and money market funds. With the likelihood of a future de-peg of a significant stablecoin, he wants to see some federally supervised insurance fund established for stablecoins.
By allowing stablecoins to offer interest, there’s a risk stablecoin issuers will directly compete with banks, undermining the ability of banks to provide credit.
There are also potential competition issues. If a BigTech acquired a large stablecoin issuer, they could extend their tech dominance into finance. He cites the Chinese example, where Alibaba extended its position in e-commerce into payments by founding Alipay. Likewise for Tencent and WeChat Pay.
The Professor also dislikes the potential ability for stablecoin issuers to engage in a wide variety of other activities, with considerable latitude given to regulators. This could lead to financial stability issues.
Various aspects of the reserve requirements were also critiqued, including concerns over the inclusion of uninsured bank deposits. However, he doesn’t suggest other options to address urgent redemption needs.
His most controversial recommendation is that all stablecoin issuers should be required to become banks.
A brief analysis
The bank recommendation is not unreasonable for large stablecoin issuers. But it will receive considerable pushback.
Firstly, the low proposed regulatory threshold for stablecoin issuers is intended to encourage innovation, a topic not really considered by the Professor.
Secondly, the federal banking regulators are viewed as having instigated Operation Choke Point 2.0 in an effort to de-bank the crypto sector. Hence, a lack of trust is evidenced in both the Senate and House Bills in their reticence to defer to banking regulators.
Combined with the SEC’s previous regulation by enforcement approach, the result is there is a risk that the regulatory pendulum could swing from one extreme to the other, impacting financial stability. That remains to be seen.
It’s unclear to what extent federal regulators have attempted to rebuild trust with Republicans by making proposals that could add more robust regulatory safeguards, while limiting the potential for abuse under a different administration.
The President’s digital assets working group notably excluded banking regulators, despite the stablecoin Bills being part of its scope.
Given the aim of delivering stablecoin legislation in 100 days, the window for Federal regulators to make their case is a narrow one.
