Since stablecoins were supercharged with the enactment of the GENIUS Act in 2025, big banks and investors have increasingly embraced this form of cryptocurrency. But attempts to legitimize and promote stablecoins overlook a major risk: namely, that the reserves backing up those stablecoins, held in the form of bank deposits, will threaten the viability and solvency of the banks that issued those deposits.
How is this possible? The cryptocurrency ecosystem has brought with it the expectation of immediate execution; stablecoin holders now assume that exchanges of their stablecoins for fiat currency will occur instantaneously. To the extent, however, that stablecoin reserves are held in bank deposits (many of which will exceed the $250,000 FDIC insurance limit), banks will not be able to provide cash to stablecoin issuers immediately, since the bulk of most banks’ assets are longer-term loans instead of short-term instruments like treasury bills. And, when word gets out that stablecoin holders are not getting paid immediately, panic will ensue, and more of those holders will demand to be paid. Hence, a run on a stablecoin, as we explain below, will cause a run on the bank or banks holding those deposits.
Stablecoin Market Growth and Regulatory Developments
For those unfamiliar with cryptocurrency, stablecoins are digital assets that are designed to be a less volatile form of digital currency. Stablecoins are intended to maintain a fixed value by pegging their value to another asset. They are typically pegged to the value of a fiat currency, i.e., a government-issued currency backed by the full faith and credit of the government that issues it; the US dollar (USD) is a prime example. Stablecoins are primarily used as payment instruments for trading on crypto exchanges and other crypto trading venues, providing an essential link between traditional fiat currencies and transactions in the cryptocurrency ecosystem.
The volume of stablecoins has increased dramatically in recent years, with the market cap for USD-backed stablecoins having grown more than 46% in the past year. Total transfers of stablecoins reached $27.6 trillion in 2024, surpassing the combined volume of Visa and Mastercard transactions in that year. Unfortunately, stablecoins are also widely used as payment instruments for money laundering, sanctions avoidance, trafficking of drugs and sex, and other illicit transactions. This is because stablecoins and crypto trading venues are far less transparent to law enforcement authorities than traditional banks and financial institutions.
The Role of U.S. Policy in Promoting Stablecoins
Prior to expressing his vigorous support of the GENIUS Act, one of President Trump’s initial actions was issuing the Executive Order, “Strengthening American Leadership in Digital Financial Technology.” That Executive Order calls for “promoting and protecting the sovereignty of the United States dollar, including through actions to promote the development and growth of lawful and legitimate dollar-backed stablecoins worldwide,” while at the same time prohibiting the development of Central Bank Digital Currencies (CBDCs) in the US. The current administration’s pro-stablecoin policies coincide with the interests of the Trump family’s cryptocurrency venture, World Liberty Financial (WLF), which launched its own stablecoin known as USD1 (now in circulation, exceeding $3.3 billion).
Presidential influence and support cannot mask the volatility of stablecoins: more than 20 stablecoins collapsed between 2016 and 2022. Additionally, the two largest stablecoins on the market, Tether’s USDT and Circle’s USDC, have faced difficult questions regarding the validity and valuation of their reserves. In 2021, the Commodity Futures Trading Commission fined Tether $41 million for issuing misleading statements about the amount of its reserves backing USDT. In March 2023, Circle held $3.3 billion (of ~$40 billion total reserves) in uninsured deposits in Silicon Valley Bank (SVB). Due to a combination of factors, SVB became the second biggest bank failure in US history. USDC briefly de-pegged, trading as low as $0.87, before recovering following federal intervention to protect all depositors.
Key Risks: Stablecoins and Bank Runs Explained
The SVB-Circle incident raises a key question about stablecoins and their relationships with banks. Some stablecoin issuers keep significant portions of their reserves in the form of deposits in FDIC-insured banks. Bank deposits are one of the six types of permitted reserve assets under the GENIUS Act.
However, the GENIUS Act does not require bank deposits held as stablecoin reserves to be 100% FDIC-insured, and a stablecoin issuer is likely to hold deposits at a bank that far exceed the FDIC’s insurance limit. If large numbers of stablecoin holders, including long-term investors, decided to redeem their stablecoins at the same time, the resulting run on stablecoins could pose a serious (and possibly life-threatening) event for banks, none of which maintains the 100% level of immediate liquidity that would be required to meet the demands of depositors in a panic-driven scenario.
Banks must balance the need for profitability with capital requirements, liquidity constraints, and the inherent risks of trying to conduct a banking business at digital speed. In the event of a run on stablecoins, even banks with significant liquidity would struggle to meet the rapid withdrawal demands of threatened stablecoin issuers. If a run by stablecoin holders and issuers threatened the survival of a systemically important bank, the FDIC would be forced to protect uninsured depositors and make stablecoin holders whole (as it did with Circle at SVB), thereby depleting the Deposit Insurance Fund and increasing moral hazard.
Additional Concerns with Money Market Fund Reserves
The GENIUS Act also authorizes stablecoin issuers to hold reserves in money market funds that invest in Treasury securities and wholesale financial market instruments. Circle allocates a substantial portion to its SEC-registered Circle Reserve Fund (USDXX). And according to Tether’s Q3 2025 reserves report (March 2025), it holds $6.4 billion in such funds.
During the systemic financial crises that occurred in 2008 and 2020, money market funds proved to be vulnerable to serious economic and financial disruptions. The Fed and the Treasury were forced to guarantee money market funds on both occasions to prevent a systemic meltdown of U.S. financial markets. Given that money market funds are not insured by the FDIC or guaranteed by any federal agency or private insurer, a widespread run on money market funds held as reserves by stablecoin issuers could compel another federal bailout to prevent large numbers of stablecoins from de-pegging and suffering catastrophic runs.
Why Stablecoins Threaten Broader Financial Stability
Stablecoins present dangerous new systemic vulnerabilities that extend beyond the cryptocurrency ecosystem to the broader financial system. This is a foreseeable risk, and one that has been exacerbated by the Administration’s determined efforts to promote this new form of private currency without any federal insurance or adequate federal oversight. Unless we take immediate steps to address this risk, it will threaten our banking system and our financial markets in a way that promises to be devastating.
Authors:
Ross Delston: Independent attorney and expert witness, formerly an Assistant GC at the FDIC during the banking crisis of the 1980s.
Molly Lutton: Law Fellow within the Law Office of Ross Delston.
Arthur Wilmarth: Professor Emeritus of Law at The George Washington University Law School.
See Also:
Wholesale CBDCs and Stablecoins: A Dual Future for Digital Finance | Disruption Banking
How BlackRock, JPMorgan & HSBC quietly murdered boring stablecoins | Disruption Banking
