Congress Must Reject the GENIUS Act and Remove the Dangers Posed by Nonbank Stablecoins

Art Wilmarth joined the GW Law faculty in 1986 after 11 years of law practice. Prior to joining the faculty, he was a partner in Jones Day’s Washington, DC office. During his 34 years as a member of the GW Law faculty, he taught courses in banking law, contracts, corporations, professional responsibility, and American constitutional history. He served as Executive Director of GW Law’s Center for Law, Economics & Finance from 2011 to 2014.

Professor Wilmarth is the author of Taming the Megabanks: Why We Need a New Glass-Steagall Act (Oxford University Press, 2020), and co-editor of The Panic of 2008: Causes, Consequences, and Implications for Reform (Edward Elgar, 2010).  He has published more than 50 law review articles and book chapters in the fields of financial regulation and American constitutional history, including The Looming Threat of Uninsured Nonbank Stablecoins, 51 Del. J. Corp. L. (2025) (forthcoming), and We Must Protect Investors and Our Banking System from the Crypto Industry, 101 Wash. U. L. Rev. 235 (2023). He is a regular contributor to the American Banker’s “BankThink” section on financial regulatory topics, including issues dealing with stablecoins and other crypto-assets.

In 2005, the American College of Consumer Financial Services Lawyers awarded Professor Wilmarth its annual prize for the best law review article published in the field of consumer financial services law. He has testified before committees of the U.S. Congress and the California legislature on financial regulatory issues. In 2010, he served as a consultant to the Financial Crisis Inquiry Commission, the body established by Congress to investigate the causes of the global financial crisis of 2007-09. He is a member of the international advisory board of the Journal of Banking Regulation (Palgrave Macmillan). He received his J.D. degree from Harvard University and his B.A. degree from Yale University.

On June 17, 2025, the U.S. Senate passed the GENIUS Act by a vote of 68-30.  As explained in my recent paper, the GENIUS Act is a deeply misguided bill that poses grave and unacceptable dangers to our financial system, economy, and society.  The GENIUS Act would allow nonbanks to sell uninsured stablecoins to the public without the essential safeguards provided by federal deposit insurance and other regulations governing FDIC-insured banks.  By placing the federal government’s seal of approval on uninsured and weakly-regulated nonbank stablecoins, the GENIUS Act would greatly increase the likelihood that future runs on stablecoins would trigger systemic financial crises and require costly government bailouts.  

To remove the intolerable threats posed by uninsured nonbank stablecoins, Congress must reject the GENIUS Act and pass legislation requiring all issuers and distributors of stablecoins to be FDIC-insured banks.  That legislation would ensure that stablecoins are covered by federal deposit insurance and are offered to the public in a safe, well-regulated manner that protects consumers and investors, maintains the stability of our financial system, and promotes the successful performance of our economy.

Uninsured nonbank stablecoins are deposit-like claims that are highly vulnerable to investor runs.

A stablecoin is a crypto-asset whose issuer represents that the stablecoin’s value will maintain parity with a designated fiat currency or some other referenced asset or group of assets. About 98% of global stablecoins are linked (“pegged”) to the U.S. dollar.  Dollar-linked stablecoins are functionally equivalent to bank deposits because their issuers represent that their stablecoins will be redeemed or transferred to third parties, on a dollar-for-dollar basis, on their holders’ demand or within a specified time.

The global stablecoin market is highly concentrated.  Tether’s USDT and Circle’s USDC account for over 80% of the market capitalization of all global stablecoins.  Stablecoins are primarily used as payment instruments for speculating in crypto-assets with fluctuating values and conducting illicit activities.  Despite the promises made by stablecoin issuers, stablecoins have proven to be anything but stable.  More than 20 stablecoins collapsed between 2016 and 2022, and every leading global stablecoin – including USDT and USDC – lost its “peg” on multiple occasions between 2019 and 2023.  

Nonbank stablecoins are inherently unstable due to their close connection to markets for crypto-assets with fluctuating values.  Those markets are also highly concentrated, as Bitcoin and Ethereum account for about 75% of the market capitalization of global crypto-assets with fluctuating values.  Bitcoin, Ethereum, and other fluctuating-value crypto-assets are highly volatile financial assets, exhibiting huge price swings during the crypto boom of 2020-21, the crypto winter of 2022-23, a second crypto boom in 2024, and a significant downturn during the first quarter of 2025.  

Nonbank stablecoins invest their reserves in traditional financial instruments, making them vulnerable to serious disruptions occurring in traditional financial markets.  When Silicon Valley Bank (SVB) failed during the regional banking crisis of 2023, SVB’s largest uninsured depositor turned out to be Circle, which held $3.3 billion of USDC’s reserves at SVB.  USDC experienced a major run after SVB failed, and USDC’s value fell to $0.87.  USDC avoided a complete collapse only because the federal government decided to rescue Circle and SVB’s other uninsured depositors.  Thus, we’ve already experienced our first government bailout of uninsured nonbank stablecoins.

Runs on nonbank stablecoins resemble the runs that occurred on uninsured deposits, money market mutual funds (MMMFs), and other uninsured, short-term financial claims during U.S. financial crises stretching from the nineteenth century through 2023.  The federal government rescued uninsured depositors during financial crises in 1980-92, 2007-09, and 2023.  The federal government also protected investors in MMMFs and other uninsured short-term financial instruments during financial crises in 2008 and 2020.  As those events demonstrated, nonbank stablecoins and other uninsured, short-term financial claims are highly vulnerable to investor runs whenever there are substantial doubts about the obligors’ ability to repay those claims in a timely manner.  The GENIUS Act ignores the lessons of history by establishing a weak and inadequate regulatory regime for stablecoins, and by failing to provide a federally-supervised fund to ensure their timely repayment. 

Uninsured nonbank stablecoins will not improve our payments system or increase financial inclusion.

The crypto industry claims that nonbank stablecoins will greatly improve our payments system and increase financial inclusion.  In fact, nonbank stablecoins operating on permissionless public blockchains are not a viable technology for providing fast, reliable, and cost-effective general-purpose payments or other large-volume financial services.  Permissionless public blockchains suffer from two major problems – lack of scalability and immutability (i.e., the inability to correct erroneous, fraudulent, and unauthorized transactions).  Those problems – which arise out of the basic tenets of public blockchains – prevent public blockchains from providing a feasible technology for large-volume financial services. 

To mitigate the scalability problem, public blockchains have used “Layer 2” strategies, including sidechains and off-chain processing.  “Layer 2” strategies delegate responsibility for processing and validating transactions to designated groups, which transmit their work to the public blockchain.  Such delegations cause public blockchains to move toward the characteristics of permissioned distributed ledgers, which are administered by banks, broker-dealers, clearing facilities, and other traditional financial institutions.  Public blockchains that essentially operate like permissioned ledgers have no justification for being regulated differently from traditional financial intermediaries.  

As SEC Commissioner Caroline Crenshaw pointed out, the crypto industry keeps touting the “revolutionary” nature of “decentralized” public blockchains while actually creating centralized structures like stablecoin issuers and crypto exchanges, which mimic the functions of traditional financial intermediaries.  The crypto industry demands “light touch” regulatory treatment for its copycat structures, but Commissioner Crenshaw rightly asked the following question:

If the [crypto blockchain] technology is so revolutionary, why do so many of its uses seem to revolve around recreating the existing financial system, except with less regulation, more opacity, fewer investor protections, and more risk?  

In addition to their unsuitability for general-purpose payments, nonbank stablecoins have not shown any ability to increase financial inclusion.  Stablecoin holders must have bank accounts to convert their fiat currency into stablecoins, and to convert their stablecoins back into fiat currency.  Stablecoin holders must also have internet access and financial sophistication, which many “unbanked” households lack.  The crypto industry’s past dealings with underserved communities have included widespread predatory practices, including fraudulent marketing of high-risk crypto-assets and “crypto ATMs” that charge high fees and promote scams.

If Congress truly wants to promote a faster, cheaper, and more inclusive payments system, Congress should (i) support tokenization of deposits on permissioned distributed ledgers administered by FDIC-insured banks, (ii) encourage faster implementation of real-time settlement services for bank payments, and (iii) require FDIC-insured banks to provide low-cost deposit accounts with payment services to lower-income individuals and families who request such accounts and satisfy minimum qualifications for lawful status and financial responsibility.  The foregoing approach would significantly improve our payments system and increase financial inclusion without undermining the integrity and effectiveness of our federally-insured banking system.

Uninsured nonbank stablecoins would allow Big Tech firms and other commercial enterprises to enter and dominate the banking business. 

The GENIUS Act would allow Big Tech firms and other commercial enterprises to acquire nonbank stablecoin issuers and use those issuers’ funds and services to establish dominant financial empires.  Alphabet (Google), Amazon, Apple, Meta (Facebook), Walmart, and X are poised to enter the stablecoin market if the GENIUS Act becomes law.  That outcome would undermine our nation’s longstanding policy of separating banking and commerce and create enormous risks.  Allowing commercial firms to issue and distribute stablecoins would give those firms access to their customers’ private financial data.  That access would increase exponentially the ability of Big Tech firms to sell their customers’ private information to third parties and use the same information to market their own goods and services. 

Allowing commercial firms to enter the banking business by acquiring stablecoin issuers would produce excessive concentrations of financial and economic power and political influence, and would create severe risks of contagion between the financial and commercial sectors of our economy.  Those contagion risks would greatly increase the likelihood that future financial and economic disruptions would spread across the entire span of our economy.  To keep Big Tech firms and other commercial enterprises out of banking, Congress must reject the GENIUS Act and pass legislation requiring all stablecoin providers to be FDIC-insured banks.

Uninsured nonbank stablecoin issuers would create a “Shadow Banking 2.0” regime and inflate a “Subprime 2.0” crypto bubble.

The GENIUS Act would allow uninsured nonbank stablecoins to become a dangerous new

form of “shadow deposits” and create a “Shadow Banking 2.0” regime.  The GENIUS Act would enable nonbank stablecoin issuers to siphon away large amounts of deposits from FDIC-insured banks.  The loss of those deposits would severely impair the ability of community and regional banks to provide much-needed loans to consumers and Main Street businesses.  Nonbank stablecoin issuers could not replace those lost loans because they would be required to invest virtually all their assets in designated financial instruments held as reserves.  

The GENIUS Act would also permit nonbank stablecoin issuers to sell crypto derivatives and other crypto investments that are determined by federal and state regulators to be “incidental” to the activities of crypto asset service providers.  Such high-risk investments would inflate a “Subprime 2.0” crypto bubble by producing multiple, highly-leveraged bets on crypto-assets with fluctuating values.  The resulting pile of speculative bets on crypto-assets would resemble the toxic pyramid of bets on subprime mortgages, which large financial institutions created by issuing trillions of dollars of financial and credit derivatives during the “Subprime 1.0” credit boom of the early 2000s.  

The collapse of the “Subprime 1.0” credit boom caused the global financial crisis of 2007-09. The speculative crypto bubble produced by “Shadow Banking 2.0” and “Subprime 2.0” would almost certainly lead to a similarly devastating crash, with highly damaging spillover effects on traditional financial markets.  Federal agencies would be hard-pressed to contain such a crash by arranging bailouts comparable to those of 2007-09 and 2020-21.  Given the federal government’s massive and rapidly growing debt burden, such bailouts might well trigger a systemic crisis in the Treasury bond market as well as a significant depreciation of the U.S. dollar.

Conclusion

The GENIUS Act presents enormous and intolerable threats to our financial system, economy, and society.  In addition to the dangers described above, the GENIUS Act has many other significant shortcomings, including (i) perilously weak reserve requirements for stablecoins; (ii) excessively lenient capital, liquidity, and risk management standards for stablecoin issuers; (iii) severely deficient chartering criteria for nonbank stablecoin issuers and woefully inadequate enforcement powers for federal regulators over state-chartered issuers; (iv) few protections for consumers; (v) an ineffective bankruptcy process for failed stablecoin issuers; (vi) the lack of any federally-funded support for failed stablecoin issuers, greatly increasing the probability of ad hoc government bailouts; and (vii) a gaping foreign issuer loophole, which would allow crypto exchanges to offer and sell to U.S. customers stablecoins issued by poorly-regulated foreign entities.  Those defects provide further reasons for Congress to reject the GENIUS Act and pass legislation requiring all stablecoin providers to be FDIC-insured banks.

The opinions shared in this article are the author’s own and do not reflect the views of any organization they are affiliated with.

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