- Key insight: The Federal Reserve has proposed a framework for bank subsidiaries to apply for permission to issue stablecoins while outlining regulatory standards and supervisory practices for overseeing them.
- Expert quote: "While the Board's proposal is an important step in GENIUS Act implementation, further work will undoubtedly be required if stablecoins are to be reliable payment instruments." — Federal Reserve Gov. Michael Barr
- Forward Look: The public will have 60 days to submit comments about the proposals.
The Federal Reserve Board moved Thursday to implement its portion of the landmark stablecoin bill that was signed into law last summer.
In accordance with the Guiding and Establishing National Innovation for U.S. Stablecoins, or GENIUS Act, the Fed proposed a rule that would set regulatory requirements for authorized stablecoin issuers that fall under the central bank's purview, including state members banks of the Federal Reserve System and other state-charted issuers.
The board also issued a proposed framework for Fed-supervised banks to get approval for subsidiaries that issue stablecoins.
The GENIUS Act directed the Fed, Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the National Credit Union Administration to issue rules effectuating the various elements of law, including regulatory and supervisory oversight.
Other agencies
Under the act, the Fed has the authority to oversee stablecoin issuers that are subsidiaries of state member banks as well as state-chartered institutions that do not have federal deposit insurance but have $10 billion or more of stablecoins.
Permitted payment stablecoin issuers, according to the proposal, will be required to fully back their stablecoins with "permissible reserve assets," including short-term Treasury bills and other high quality liquid assets. They will also be subject to capital requirements to address credit and operational risks, and they will face risk management standards outlined in the proposal.
In accordance with the GENIUS Act, the Fed rule also notes that stablecoin issuers will be barred from paying interest or yield "solely in connection with the holding, use, or retention of payment stablecoins" — a major concern
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The rule outlining the application process for subsidiary stablecoin issuers notes that firms will have to submit a business plan, financial information and other supporting documents. It also establishes a process for appeals, hearings and final determinations for applications.
The Fed's seven-member board voted unanimously to issue the proposals. The public will have 60 days to submit their comments on the proposal.
Fed Gov. Michael Barr — the board's former vice chair for supervision and a frequent dissenter to regulatory changes — said he was encouraged by key provisions of the GENIUS Act, including reserve asset limitations and capital requirements. Barr also noted that he looks forward to seeing public comments on these provisions.
"It will be useful to have public input on both of these aspects of the proposal, and in particular on whether the rule adequately addresses interest rate and foreign currency risks," he said in a statement issued alongside the proposal. "In addition, it will be important that universal redemption rights are clear in the final rule to support public confidence in access to their funds."
Still, Barr said he has concerns, namely with how the stablecoin framework would work alongside the Fed's revised standards for money laundering oversight. He noted that a
"As is the case on the Board's July proposal, I am concerned that the 'significant or systemic' standard may have unknown effects on the Board's ability to effectively substantiate that an institution establishes and maintains compliant programs," he said. "While the Board's proposal is an important step in GENIUS Act implementation, further work will undoubtedly be required if stablecoins are to be reliable payment instruments."
