Executive Summary

The GENIUS Act, recently signed into law, establishes a dual federal and state regulatory framework for stablecoins, a new tech-driven financial product, effectively segmenting the USD stablecoin market into GENIUS-compliant stablecoins and those that are not. This paper first discusses the use cases and potential benefits of stablecoins in terms of payment system efficiency and costs. It then analyzes the financial stability risks associated with both GENIUS-compliant and unregulated stablecoins using historical analysis and case studies. This assessment is supported by a new Andersen Institute survey of expert opinions canvassed through Large Language Model (LLM) analysis of U.S. podcast episodes on stablecoins.

Our survey of expert opinions suggests that stablecoins hold the promise of revolutionizing the domestic and international USD payment system by lowering transaction costs, shortening settlement times, providing continuous 24/7 payment system access, and possibly improving financial inclusion. In particular, for banks and other financial institutions, stablecoins could make wholesale settlement more efficient and allow for real-time collateral management. For nonfinancial businesses, stablecoin payments could reduce interchange fees and improve payables and receivables management. With their relatively low barriers to entry, stablecoins could improve financial inclusion in traditionally underbanked communities, if combined with the expansion of internet access.

At the same time, our survey of experts and case studies suggest that stablecoins may pose significant financial stability risks if the market grows as large as currently predicted, especially if such scale is achieved in a short period of time. The new regulatory framework introduced by the GENIUS Act, with specific design features aimed at addressing some inherent vulnerabilities, has the potential to ameliorate some of the financial stability risks (relative to noncompliant stablecoins), but does not eliminate them.

GENIUS-compliant stablecoins are expected to be relatively safe instruments. They are intended for payments, are not supposed to pay any interest, and can be issued and held globally. GENIUS-compliant stablecoin issuers are restricted to borrowing in repo markets only for specific reasons, mostly related to meeting liquidity needs. However, they are not federally insured and do not have access to a public liquidity backstop. As a result, they remain runnable to the extent to which their reserve assets are not perfectly safe and liquid. As the market develops, they are likely to become more deeply interconnected with the crypto and traditional financial systems, raising additional important financial stability concerns.

Surveys and available data indicate that stablecoins so far have been primarily used to facilitate cryptocurrency market activities, which are inherently volatile and speculative, rather than as a payment tool. Existing evidence of a leverage buildup within crypto markets suggests that a shock would transmit more easily to traditional financial markets and institutions.

Other factors may contribute to an increase in financial stability risks associated with GENIUS-compliant stablecoins. One is related to the provision of automatic, seamless conversion of non-interest bearing stablecoins into tokenized yield-bearing products, which are then used to fuel the growth of digital lending built on private digital money. A second concern is the issuance of GENIUS-compliant stablecoins by nonbank entities (allowed under the GENIUS Act) that could contribute to increased competitive pressures on banks, especially if the scope of stablecoins expand beyond just payment functionality.

By contrast, GENIUS-noncompliant stablecoins are much riskier instruments. They invest in less liquid reserve assets and potentially employ leverage. Evidence from the 2022-23 bank runs in the United States and historical lessons from the U.S. era of free banking in the 19^th century suggest that stablecoins runs have the potential to occur at higher frequency, at faster speed, and at larger scale.

Unregulated stablecoins are popular cryptocurrencies for illicit finance and have been used to avoid sanctions or fund terrorism. However, all varieties of stablecoins are likely to continue to support cryptocurrency market activity, exacerbating existing operational, cyber, and fraud risks.

A multi-trillion dollar GENIUS-compliant stablecoin market would bring a number of structural market changes with it. Stablecoins will affect the structure, pricing, and functioning of financial markets; they will also deepen the interconnection between the crypto ecosystem and traditional markets and financial institutions. The impact will depend not only on the speed of growth, but also on the source of demand. If stablecoin market growth comes from a decline in currency in circulation, all eligible reserve assets under the GENIUS act will benefit, without risks to bank intermediation. However, if the reallocation comes primarily from bank deposits, then banks facing large outflows may cut their long-term securities holdings or issue fewer loans, with smaller banks likely facing greater disintermediation risk. Larger banks may also respond by repricing deposits more aggressively or by developing their own stablecoins to stave off competition. Reallocation from MMFs may not significantly impact financial markets, in particular the T-bill market, given the similar portfolio composition of MMFs and GENIUS-compliant stablecoin reserves. Demand for GENIUS-compliant stablecoins may also come from abroad, creating new indirect demand for U.S. dollar-denominated reserve assets, potentially supporting the U.S. dollar.

Finally, our survey of experts sees the impact of stablecoin market development as neutral on the U.S. dollar’s status as the international reserve currency. On the one hand, a cheaper and faster means of payments for international trade, financial flows, and remittances should foster demand for the U.S. assets backing GENIUS-compliant or noncompliant stablecoins pegged to the dollar. On the other hand, widespread international adoption of multiple privately issued dollar stablecoins with varying degrees of credibility would weaken the network effects associated with the fiat dollar and likely result in a more fragmented USD payment system.