By Priya Menon
The Federal Reserve on Thursday published two regulatory proposals aimed at folding payment stablecoins into the statutory banking framework. The package advances implementation of the Guiding and Establishing National Innovation for U.S. Stablecoins Act - commonly referred to as the GENIUS Act - which was approved last year and must be implemented by no later than January 2027.
The first, primary proposal sets out strict asset backing and capital safeguards for entities supervised by the Board. Under this proposal, issuers would be required to fully back payment stablecoins with permissible high-quality liquid assets, with short-term Treasury bills identified as the principal eligible instrument. In addition to asset backing, the framework would impose standardized capital requirements aimed at buffering issuers against operational and credit risk exposures. The proposal also contains a clear prohibition on offering yield or interest solely as an inducement to hold the digital tokens.
The Fed simultaneously released a secondary proposal that creates a tailored approval pathway for insured state member banks that want to authorize subsidiaries to issue payment stablecoins. The proposed process would require applicants to submit comprehensive materials - including business plans, detailed financial statements, biographical reports for key personnel, and risk-management policies - along with documentation of the proposed capital structure for the issuing subsidiary.
These proposals were published in parallel with coordinated rulemaking activity from peer federal regulators, including the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. Collectively, the agencies intend for these regulatory actions to establish strict operational and prudential standards ahead of the GENIUS Act's statutory enforcement deadline.
Fed officials stressed that the proposals are not final and that several areas remain subject to further refinement. Federal Reserve Governor Michael S. Barr highlighted two specific priorities: ensuring stablecoins remain redeemable at par during episodes of market stress and addressing limitations related to enforcement capacity in the area of bank anti-money laundering compliance.
Both proposals will be open for public comment for 60 days following their appearance in the Federal Register. Market participants, including investors and digital asset service providers, are expected to closely follow the public comment period, because the responses received will shape final rule language and determine the compliance requirements and operating costs for banks and other institutional participants that seek to engage in the stablecoin market.
Key points
- Board-supervised issuers would need full backing of payment stablecoins with permissible high-quality liquid assets, primarily short-term U.S. Treasury bills.
- Standardized capital requirements are proposed to mitigate operational and credit risks, and issuers would be barred from paying yield solely for token holdings.
- A separate application regime is proposed for insured state member banks seeking to have subsidiaries issue payment stablecoins, requiring extensive business, financial and risk documentation.
Risks and uncertainties
- Final regulatory requirements may change during the 60-day public comment period, affecting operational costs for issuers and banks.
- Enforcement limitations tied to bank anti-money laundering capabilities could constrain regulatory effectiveness in certain areas.
- Maintaining redeemability at par during market stress presents operational and liquidity management challenges for issuers and their banking sponsors.
Disclosure
Priya Menon is an industrials analyst focusing on aerospace, defense and machinery, with experience in operations and supply chain management. The reporting reflects the Federal Reserve's published proposals and statements as described in the proposals and accompanying commentary.