It has been almost one year since the passage of the crypto industry’s crowning legislative achievement thus far, the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, which means that the deadline set by Congress for federal regulators to submit their rules for implementation is rapidly approaching. Proponents of the GENIUS Act argue that it will provide a comprehensive regulatory framework for stablecoins, protecting consumers and investors.
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But criticism continues to pour in from a group of unlikely bedfellows, namely, several prominent progressive lawmakers and banking industry groups worried about the dangers shaky stablecoin regulation poses to the traditional financial system.
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The pushback from the banking sector on crypto-friendly GENIUS implementation is just one battle in a larger war the two industries are currently waging in the halls of the federal government. Wall Street may be holding its own in Congress—the Clarity Act, another industry-backed crypto bill drawing major ire from the banks, is currently stalled in the Senate ahead of a potentially fatal August recess—but the GENIUS Act proposals suggest crypto may be pulling ahead in the fight to control major financial regulatory agencies.
Unlike other cryptocurrencies, stablecoins are pegged to a traditional marker of value, almost always the U.S. dollar, and supposedly backed by real assets like cash, stocks, real estate, etc. The promise to customers is that they will get their money back if they want to get rid of their stablecoin. Much like a pre–New Deal bank, stablecoins are inherently vulnerable to a run. If the underlying asset suffers some bad news, customers are liable to panic and try to cash in their stablecoins all at the same time, forcing a fire sale at discount prices. But stablecoins also come with risks those banks did not. Since they act as a sort of middleman between crypto and the rest of the world, if there’s a panic in the crypto markets—which happens all the time—customers may want out of their stablecoin accounts too, and more panic ensues. Either way—if there’s worry in the underlying assets or in the crypto world—nothing can stop a run and prevent customers from losing money.
Sure enough, virtually every major stablecoin has on multiple occasions. In 2022, TerraUSD, then the third-largest stablecoin, collapsed entirely when its “algorithmic” peg system, designed to get around the need for real assets with computer trickery, turned out to be a recipe for hyperinflation at the first sign of trouble. The GENIUS Act does at least exclude similar algorithmic coins from the definition of a “payment stablecoin,” but even bona fide fiat-backed stablecoins are often stumbled. The largest stablecoin, Tether, saw its value fall after the Terra crash and has further wobbled over questions around its books, which turned out to include a lot of risky bets on Chinese real estate. The FDIC had to step in to save Circle after the 2023 collapse of Silicon Valley Bank, where the stablecoin held $3.3 billion in reserve assets. “Stablecoin, despite their name, haven’t proven to be all that stable,” explains Mark Hays, the associate director for cryptocurrency and financial technology at Americans for Financial Reform. Even so—thanks in large part to the passage of the GENIUS Act and President Trump’s crusade to legitimize crypto—stablecoin’s presence in the financial world exploded over the past year, bringing all of its volatility along with it.
Now, as the Clarity Act, another industry-backed crypto bill, bobs and weaves its way through the Senate, federal agencies have a chance to address some of the risks associated with the weak regulatory scheme in the GENIUS Act. “Those rulemakings in a normal world would be an opportunity to fix or strengthen those measures or maybe close some gaps,” explains Hays. But rules proposed by regulators like the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) would do the opposite. “We’re seeing an enabling of the industry’s wish list when it comes to how they want to balance these scales,” Hays told the Prospect.
Leading the charge is Jonathan Gould, Trump’s comptroller of the currency, whose office will be one of the main regulators of stablecoins and who worked as the chief legal officer at a blockchain firm during the Biden administration. Gould has already ushered through a number of preliminary trust bank charters for stablecoin issuers like Crypto.com, Ripple, and Circle after passage of the GENIUS Act, which establishes trust banks chartering as one of several pathways to become a permitted payment stablecoin issuer (PPSI). The Trump family’s crypto firm, World Liberty Financial, also applied for a trust bank charter in January. Gould is expected to announce his decision soon, which two anonymous OCC staffers told NOTUS last week is all but guaranteed to go in the president’s favor.
Traditionally, trust banks are confined to a limited set of activities in the management of client assets. Trusts are not allowed to engage in other traditional banking activities such as accepting demand deposits, facilitating payments, or issuing loans. As a result, they are subject to a far more lenient regulatory regime than other banks, with fewer requirements and less oversight.
The GENIUS Act allows stablecoin issuers with these charters to engage in many of the activities that traditional trust banks can’t with no additional regulation—and many crypto firms are fully prepared .
The OCC’s proposed GENIUS implementation does nothing to address this misalignment. In fact, the office changed its rules in February to relax previous restrictions on trust bank activities while maintaining the same “light touch” regulation. In response to criticism from progressive lawmakers and banking organizations alike on the freehanded chartering practices, Gould explained that the OCC was looking to restore bank chartering to pre-2008 levels. “We don’t have a zero risk tolerance anymore,” he told a Semafor forum on financial technology.
The sentiment seems like it should fit with the typical deregulatory agenda championed by Wall Street that Gould—who spent most of his pre-crypto career working for or advising traditional finance firms—has been pushing as comptroller. But, remarkably enough, Wall Street is pushing back hard against the crypto company charters and the rest of the OCC’s GENIUS implementation.
The reasons are varied. On top of the trust bank charter concerns, a range of comment letters on the OCC proposal from banking industry organizations (many joined by consumer advocacy groups) have criticized the proposal for vague regulatory standards that would impose a heavy load of case-by-case decision-making on a badly understaffed agency. The OCC lost nearly 30 percent of its workforce over the last couple of years, down to about 2,600 from 3,600 in 2024, thanks to DOGE and Russell Vought. Gould’s proposed GENIUS implementation would require an already strained office to make incredibly consequential calculations every time a stablecoin question arises.
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The FDIC, another primary regulator of stablecoin, , including a significant number of risk examiners. Like Gould, Trump’s choice for FDIC chair, Travis Hill, had a track record of easing crypto regulations before his appointment. Like the OCC proposal, the FDIC proposal also leaves much of the regulatory framework up to discretionary decision-making. An inspector general in March raised concerns about the agency’s workforce attrition and implications for financial security.
Various critics of the FDIC’s rulemaking proposal argue that it introduces the risks of cryptocurrency runs into the mainstream banking system. Most people on Wall Street will admit that at least some regulations, above all deposit insurance, are important to protect the banking system.
The GENIUS Act allows depository institutions insured by the FDIC to issue stablecoin through subsidiaries and manage the reserve assets for stablecoin issuers in insured accounts. As noted above, stablecoin itself is not covered by federal deposit insurance, so a run on those accounts can threaten the institution at large and force the FDIC to dip into the deposit insurance fund. This isn’t a theoretical concern. It already happened during the collapse of Silicon Valley Bank and Signature Bank, in which the FDIC spent billions of dollars to bail out stablecoin issuers with reserve assets in the two banks.
The 2023 episode stayed relatively contained in tech-specific banks with abnormal exposure to crypto, but as stablecoin activity is increasingly intertwined with the mainstream banking system, a similar disruption could have far-reaching consequences. “By introducing these products into the mainstream banking system, we are endangering the FDIC-backed institutions we all rely on that save our money and grow our retirement,” Amanda Fischer, policy director and chief operating officer for the advocacy group Better Markets, told the Prospect.
Traditional financial institutions aren’t normally ones to be worried about the security of retirement savers and the regular people who entrust them with their money. But the lax regulatory scheme does raise concerns for banking groups about the “competitive playing field between banks and PPSIs,” according to a from the Bank Policy Institute and the Consumer Bankers Association. If stablecoin companies can offer bank-like services without the same irksome regulations weighing them down, they might be able to offer more appealing—but far riskier—products to clients and expand in ways that regular banks can’t. The banks are especially worried about a loophole allowing interest-paying stablecoin accounts that might siphon off funding that would otherwise go into traditional bank deposits, and thus traditional bank loans for cars and homes, into dubious crypto schemes.
Finally, critics across the board are expressing concerns about a lack of coordination between agencies as the July 18 statutory deadline looms. The Federal Reserve has yet to release any rulemaking proposals outside of a joint customer identification rule, and other primary regulators are also behind on a variety of required rulemakings. The consequences for missing the deadline will likely not amount to any more than a light slap on the wrist, but without the Fed’s proposals, the OCC, FDIC, and others will be finalizing important regulatory frameworks without the ability to align their rules with perhaps the most important player in maintaining macroeconomic stability. No matter what, the GENIUS Act will go into effect on January 18, 2027, which could mean a flood of stablecoin activity without a complete regulatory framework in place if agencies continue to lag.
For his part, the former Wall Street player Gould isn’t budging. Indeed, he invited potential litigation from banking groups over the charters, telling the same Semafor forum mentioned above that lawsuits help the OCC keep their “pencils a little bit sharpened.”
The rulemakings that have already been proposed are still far from cohesive, and agencies aren’t allowed to amend anything in the final rules outside the scope of the comments they received. The discordant regulatory regimes in the proposals thus far present an opportunity for stablecoin firms to “charter shop” in order to get the lightest-touch regulation, according to Fischer. Investment banks and mortgage brokers engaged in similar behavior ahead of the 2008 financial crisis for their complex derivative products and subprime loans.
Wall Street might be looking back on those days of bank-specific deregulation with nostalgia. It’s hard when a new baby comes along and you’re not the favorite child anymore. But maybe someone should teach them to be a little more appreciative. Just because crypto is getting everything it wants doesn’t mean the banks aren’t also getting richer watching regulators adopt their own dangerous wish list.
In many ways, it’s no real surprise that regulators under the Trump administration are prioritizing the wishes of the crypto industry over concerns around financial stability. After all, Trump has filled the federal government with crypto enthusiasts while purging his agencies of career officials and experts—a charge led by one of crypto’s most vocal champions and our very favorite newly crowned trillionaire, Elon Musk. But it is certainly an ironic twist of fate for traditional financial institutions that have been enjoying their own deregulatory perks from the Fed, the SEC, and others. It might even be satisfying to watch Wall Street choke down a taste of its own medicine, if the emerging stablecoin infrastructure didn’t pose such a significant risk to financial stability and the broader economy.
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