US Officials, Academics Say Stablecoin Rulemaking Still Has a Long Way to Go

Doohyun Hwang

Summary

In the US, policy debate over stablecoins is continuing, and many detailed issues remain unresolved even after the GENIUS Act.
A former Treasury official and the Fed said stricter regulatory standards are needed for the GENIUS Act, reserves, capital, liquidity, risk management, reserve-asset rules, regulatory arbitrage and anti-money-laundering (AML).
The Fed and academics said stablecoins can reduce cross-border payment costs, but they could also affect central-bank monetary policy, underscoring the need for further institutional reforms including whether to allow interest (yield) payments.

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Policy debate over stablecoins is continuing in the US, with key details still unresolved even after the GENIUS Act was enacted in July last year.

Forbes reported on May 1 that Nellie Liang, who served as Treasury undersecretary for domestic finance during the Biden administration, recently highlighted the law’s limitations in a Brookings Institution report.

The GENIUS Act requires payment stablecoins to be backed one-for-one by reserves, Liang wrote. But regulators need stricter standards on capital, liquidity and risk management to prevent bank-run-style mass redemptions and establish stablecoins as a trusted means of payment.

The Federal Reserve is also monitoring prudential risks and the implications for monetary policy. In a recent speech, Fed Governor Michael Barr said the GENIUS Act represented important progress, but added that the outcome will depend on how federal and state regulators implement key issues including reserve-asset rules, regulatory arbitrage, the scope of permitted activities for issuers and anti-money-laundering compliance.

The Fed made a similar point in a related report, saying stablecoins can lower the cost of cross-border payments. At the same time, it said they could affect liquid-asset markets at home and abroad, creating variables for central bank balance sheets and the conduct of monetary policy.

Academics have also proposed specific reforms to strengthen the monetary features of stablecoins. In a recent paper, Professor Yesha Yadav proposed five changes: allowing eligible issuers access to Fed master accounts, creating industry funding insurance, improving bankruptcy rules, establishing payment-finality rules and explicitly tokenizing redemption claims.

Officials and experts are also actively debating whether issuers should be allowed to pay interest, or yield, on stablecoins. A financial-industry official said the range of views points to a shared conclusion: considerable policy work is still needed for stablecoins to realize their potential.