Art Wilmarth, writing in Open Banker, summarises what I take to be the view of the banking establishment, saying that because of the “intolerable threats” to banking system stability engendered by uninsured nonbank stablecoins, regulators should reject the GENIUS Act and pass legislation requiring all issuers to be FDIC-insured banks. I think this is a very narrow view. The reason that we have FDIC insurance is because fractional reserve banks are vulnerable to runs, but a stablecoin backed by high quality liquid assets (HQLAs) such as Treasury Bills is not: if the issuer fails, the stablecoins can still be redeemed against the reserve.
We have already seen this work in the UK when Wirecard failed. Wirecard Card Solutions was regulated under the UK’s Electronic Money Regulations 2011 (based on the EU’s Electronic Money Directive) and provided issuer and payment processing services for many fintechs and prepaid card programs (Curve, Pockit, Anna Money, etc.). When Wirecard in Germany collapsed and the FCA temporarily froze WCSL’s activities, UK cardholders could not access their funds over weekend. Wirecard’s UK customers were protected because of the e-money regulation: the safeguarding of client funds, enforced by the FCA, ensured that clients’ money was ring-fenced from the company’s own assets and available for transfer to new providers. In the USA, the regulatory structure is fragmented, with weaker, less consistent protections—so a similar collapse could have much worse outcomes for American customers.
ELMI have to hold customers funds in the equivalent of HQLAs. Wirecard’s shareholders were wiped out, but customer funds were safe and were transferred Wirecard in the UK was an electronic money institution (ELMI), a regulatory category that does not exist in the US.
Snippings 