WASHINGTON — Bankers are beginning to raise concerns about Republicans' push to finalize stablecoin legislation this Congress, a marked shift from the industry's approach to
The Senate Banking Committee will later today mark up the most robust and serious stablecoin bill that's come out of Congress yet — the GENIUS Act, primarily sponsored by Sens. Bill Hagerty, R-Tenn., and Senate Banking Committee Chairman Tim Scott, R-S.C.
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But while the bill has some degree of bipartisan support — with freshman Maryland Sen. Angela Alsobrooks backing the bill on the Democratic side — it's still expected to face tough pushback from Senate Banking Committee ranking member Sen. Elizabeth Warren, D-Mass. The bill will need 60 votes in the Senate to advance, meaning seven Democrats will have to join the Republican majority. Warren's opposition makes that difficult, as she wields outsized influence in her caucus on banking issues.
According to a briefing document from Warren's office on the bill obtained by American Banker, Warren is expected to criticize the mingling of banking and commerce under the bill, particularly by big tech companies.
"Under current law, Big Tech companies and other commercial conglomerates are prohibited from issuing their own currencies in the U.S.," Warren's office said in the document. "If these firms want to engage in payments, they must partner with, or facilitate transactions among, regulated financial institutions. But this stablecoin bill breaks that status quo by greenlighting Big Tech companies and other commercial conglomerates … to issue their own stablecoins, which is the functional equivalent of a bank deposit."
Warren will offer an amendment at the markup that would prohibit nonfinancial companies from affiliating with or controlling a payment stablecoin issuer, according to Democratic aides with knowledge of the markup. Democrats are also expected to offer amendments to prohibit "bailouts" via the Federal Reserve's emergency lending facilities and the Treasury's Exchange Stabilization Fund and that would limit the permissible stablecoin investments to very safe assets, the aides said.
This idea — that this bill or others like it would allow stablecoins to be the "functional equivalent of a bank deposit" — has long been a point of contention for some scholars and other experts, who have argued that the bills being considered by Congress would inappropriately merge banking and commerce, and would disintermediate banks in the process.
"If we set up a regime where it is possible for the largest tech companies to accept the functional equivalent of deposits while at the same time running all of their other platforms with all the data and customer base that they entail, I think that there's a real possibility that banks could find themselves outcompeted by these tech platforms," said Hilary Allen, a professor of law at American University who specializes in bank law.
That might be an issue not just for banks who could find themselves outcompeted by Silicon Valley tech companies, but for the functioning of the economy as a whole. She argues that if people start using stablecoins more, that means more money will be parked in stablecoin reserves, which is "essentially the equivalent of sticking money in the mattress rather than lending it out into the economy."
"Many of the largest banks were sort of sleepwalking through this, assuming that they would be the beneficiaries," Allen said. "There has been an assumption amongst the largest banks that they will be the winners in all of this, and I think as concentrated and powerful as the largest banks are, that's nothing compared to the levels of concentration of economic power that you see in Silicon Valley."
This could introduce more instability into the banking system — the precursors of which we might have already experienced with the failure of Silicon Valley Bank and other large regional institutions two years ago.
"Risk in stablecoins is directly tied to the extreme volatility in the greater crypto market," said Amanda Fischer, policy director and chief operating officer at the progressive watchdog Better Markets. "When crypto investors flee to withdraw their stablecoins for cash, stablecoin issuers will rush to pull their reserve assets from uninsured bank accounts, money market funds and repo arrangements. The result will be banks and funds selling assets at firesale prices and posting big losses, for which taxpayers will be on the hook."
While bank groups aren't sounding the alarm to quite the same degree, there's a definite uptick in concerns from the industry.
"Our industry has long advocated for a durable framework that will spur innovation while promoting financial stability and protecting access to credit for consumers," said Brooke Ybarra, head of the American Bankers Association office of innovation, in a statement to American Banker. "We applaud the committee's work to establish such a framework for stablecoin and are hopeful that any final legislation will avoid incentivizing a flow of deposits out of the banking system and protect the fundamental role that banks play in intermediating credit and powering the economy."
The group was more pointed in a statement for the record to members of the House Financial Services Committee as the panel debated on its own stablecoin legislation earlier this week.
"Payment stablecoin has the potential to significantly disintermediate core commercial bank activity like deposit taking and lending," the ABA said. "This concept is not a mere competitive concern; rather it poses significant risk to the fundamental role banks play in credit intermediation."
An earlier version of the bill drew "fundamental concerns about insufficient regulation, supervision, and enforcement" from ABA, according to a letter viewed by American Banker to the Senate Banking Committee, although some of those concerns are likely to be mitigated by the bill's last-minute inclusion of provision that would prohibit payment stablecoins from generating interest.
"The bill should prohibit payment stablecoin issuers from paying interest, dividends or any type yield on payment stablecoins, in addition to avoiding consumer confusion distinguishing a payment stablecoin from a bank deposit," the letter said.
Rep. Andy Barr, R-Ky., one of the most closely aligned lawmakers with the banking industry, echoed concerns from the community banking industry not just about Central Bank Digital Currency — an idea that has
"I do care about banks and I care about the economic growth that is sourced from our banks," he said. "Some of the bankers, the community bankers out there, expressed concern about CBDCs, and maybe even payment stablecoins, in terms of the risk of eroding the deposit base."
Others say that concerns to this end are overblown.
Alexandra Steinberg Barrage, a partner at Troutman Pepper Locke, said that stablecoins, instead of being the functional equivalent of and competitor with bank deposits, would only offer competitive payment alternatives.
"You have to look at the economics of stablecoin issuance and economics of holding stablecoins, and when you do that, we think it's actually going to be expensive for banks to issue stablecoin if we're assuming a world where stablecoin aren't issuing any kind of yield or issuance," she said.
Jai Massari, cofounder and chief legal officer of Lightspark Group Inc., a bitcoin payments company, who wrote an
"In a world where stablecoins don't pay interest, like what is set out in the GENIUS Act, they're expensive for holders who have access to interest-paying deposits," she said. "If I'm a person living in the United States, I have access to a bank, a bank account and a savings account and I have access to stablecoins, what I'll really want to do is hold just enough stablecoins for whatever use cases are supported by stablecoins, because I'm not getting paid interest by stablecoins themselves."
But there still might be ways short of paying interest for stablecoin issuers to incentivize consumers to hold their money in stablecoins rather than deposits. Stablecoins still might be able to be "staked" — a long-term way of consumers agreeing to lock coins in their wallets — or could offer rewards if users agree not to trade or sell tokens.
"So we can't pay you interest directly, but you can get yield by staking," said Art Wilmarth, an emeritus professor of law at George Washington. "This will be yet another vehicle for disintermediating the banking system, undermining the banking system, cutting off flows of credit because this money can't be lent out — it has to be parked in the permitted reserves. So this won't provide any credit for consumers or main street businesses."
While the industry is pushing back against this to some extent, Wilmarth said that the outcry should be louder.
"It's kind of sotto voce, instead of shouting at the top of their lungs that we're going to die on this hill," he said. "Why would the banks not be on the ramparts? On the battlements?"
