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Trump Signs ‘Genius Act’: Banks Face Threat of Mass Deposit Outflows
By Lee Jung-hwa, Block Media
In a groundbreaking move, former President Donald Trump has signed the Genius Act into law, introducing a comprehensive regulatory framework for stablecoins. This legislation has sent shockwaves through the traditional banking sector, raising concerns about significant deposit outflows.
The Wall Street Journal reported on October 18 that the growing popularity of stablecoins might endanger traditional banks by siphoning off customer deposits—potentially shrinking the funds available for lending activities and jeopardizing their revenue streams.
Demystifying the Genius Act: What It Means for Stablecoins
The Genius Act effectively sets the stage for standardizing how stablecoins are issued and managed. Designed to stabilize cryptocurrency integration into mainstream finance, the Act brings clarity while also creating new challenges for financial institutions.
Stablecoins, which peg their value 1:1 to fiat currencies like the U.S. dollar, are currently widely used for cryptocurrency trading on exchanges. However, this legalization could broaden their adoption, making them prominent in use cases like international remittances and daily transactions.
Banks Sound the Alarm Over Potential Deposit Losses
A growing concern among banks is the prospect of losing customer deposits to stablecoin platforms. According to a U.S. Treasury Department report in April, stablecoin adoption could potentially siphon off as much as $6.6 trillion in bank deposits, an alarming figure for the financial sector.
Unlike banks, stablecoin issuers profit from investing customer funds—used to purchase tokens—into income-generating assets like government bonds. This business model makes stablecoins highly attractive while posing a direct threat to traditional financial intermediaries.
Coinbase Under the Microscope for Controversial Interest Model
Amid this evolving landscape, Coinbase, a leading cryptocurrency exchange, is facing scrutiny. The company offers USDC holders an annual return of 4.1%, mimicking interest payouts typically associated with savings accounts.
However, the Genius Act strictly prohibits stablecoin issuers from offering interest or any returns to token holders. Critics argue that Coinbase may be exploiting regulatory gaps, sparking intense debates over compliance and the need for tighter enforcement.
Regulatory Grey Areas: Financial Framework Still in Development
Although the Genius Act is now law, its full implementation hinges on forthcoming regulations from financial authorities. Key issues such as capital reserves, liquidity requirements, and operational standards are yet to be finalized. Questions also linger about whether stablecoins will face oversight equivalent to that imposed on traditional banks.
Another concern stems from the lack of deposit insurance for stablecoins. Bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account. In contrast, funds held in stablecoins are currently uninsured, potentially exposing users to higher risks in cases of financial instability.
Banks Torn Between Caution and Opportunity
While some banks view stablecoins as a growing threat, others see an opportunity to diversify revenue streams. Major financial institutions are considering strategies such as managing stablecoin reserves or issuing their own proprietary digital currencies.
At the same time, corporate giants like Walmart and Amazon are reportedly exploring the creation of private stablecoins. Such moves underscore the heightened interest in how this emerging technology could revolutionize financial ecosystems and unlock new opportunities for economic growth.
Conclusion: The Future of Finance Hangs in the Balance
The Genius Act marks a critical milestone in the journey toward regulating cryptocurrency, particularly stablecoins, but it also raises pressing questions about its impact on the traditional banking sector. As financial authorities work on finalizing the regulatory framework, both risks and opportunities abound. Whether stablecoins ultimately disrupt traditional banking or coexist as part of a hybrid financial system remains to be seen.
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