While acknowledging the GENIUS Act’s intent to establish a foundational statutory framework for privately issued stablecoins, the Federal Reserve cautions that residual regulatory gaps, overlapping federal and state authorities, and permissive reserve asset definitions collectively engender material risks to financial stability and consumer protection, risks which manifest through potential liquidity shortages when uninsured deposits are held as reserves, through regulatory arbitrage arising from fragmented supervisory regimes, and through insufficient fraud and redemption safeguards that leave certain digital assets able to circumvent oversight, thereby amplifying run dynamics, de-pegging vulnerabilities, and systemic contagion pathways absent coordinated, robust remedial measures. The Fed’s critique centers on Regulatory Fragmentation and Liquidity Risks, asserting that the dual federal-state supervisory model contemplated by the statute may generate inconsistent prudential standards, divergent supervisory expectations, and enforcement gaps that facilitate regulatory arbitrage, while permitting uninsured deposits to qualify as reserve assets creates liquidity exposures analogous to recent banking-sector stress episodes, exposures that could precipitate rapid redemption pressures and contagion if confidence erodes. Observers note that narrow statutory definitions, by excluding particular tokens and instruments from the stablecoin perimeter, risk creating regulatory loopholes through which economic functions essential to payments and value transmission could migrate, thereby diluting consumer protections and complicating forensic oversight, whereas the absence of fraud prevention measures comparable to those governing traditional payment systems leaves end users vulnerable to scams, misappropriation, and operational failures that the bill does not adequately remediate. This regulatory gap could hinder the integration of stablecoins with DeFi platforms, limiting their practical applications in the broader financial ecosystem. From a systemic perspective, the combination of redeemability at par and reserve compositions that include illiquid or uninsured assets renders stablecoins susceptible to bank-like runs, a vulnerability exacerbated by monetary policy tightening and adverse market sentiment, conditions under which herd dynamics could induce de-pegging events with spillovers into broader financial markets; prudent policy responses, according to the Fed, require harmonized supervisory standards, explicit restrictions on allowable reserve instruments, enhanced consumer safeguards, and clear, enforceable cross-jurisdictional cooperation mechanisms to mitigate fragmentation, ameliorate liquidity risks, and preserve financial stability. The Fed also emphasizes that issuers should meet baseline prudential criteria, including reserve diversification and operational safeguards to limit contagion. The Fed additionally stresses the enduring role of central bank reserves as the trusted settlement asset underpinning monetary singleness and finality.
