Since stablecoins were supercharged with the GENIUS Act in 2025, big banks and investors have increasingly embraced this form of cryptocurrency. Critics warn that the reserves backing stablecoins, held as bank deposits, could threaten the solvency of the issuing banks. The crypto ecosystem’s expectation of immediate execution means stablecoin holders expect instant exchanges for fiat, pressuring banks to provide cash promptly. When stablecoin reserves sit in deposits that exceed the FDIC’s $250,000 insurance cap, banks may not have cash available to issuers immediately because most assets are long-term loans rather than short-term instruments.
A panic or large-scale redemptions could trigger a run on stablecoins and, in turn, a run on the banks holding those deposits. Stablecoins are pegged to fiat currencies and are used as payment instruments linking traditional currencies with crypto trading. The volume of stablecoins has grown dramatically, with USD-backed stablecoins’ market cap up more than 46% in the past year, and transfers totaling $27.6 trillion in 2024, surpassing Visa and Mastercard.
Stability has been questioned: Tether and Circle have faced reserve valuation questions, and Circle held uninsured deposits at Silicon Valley Bank during SVB’s collapse. In 2021, the CFTC fined Tether $41 million for misleading statements about reserves. USDC briefly de-pegged to as low as $0.87 before recovering after federal intervention.
The GENIUS Act permits reserves to be held in money market funds that invest in Treasuries and wholesale instruments. Money market funds lack FDIC insurance and were guaranteed during crises in 2008 and 2020 to prevent systemic meltdown. Given those vulnerabilities, a widespread run on money market funds held as stablecoin reserves could trigger another federal bailout. If a run threatens a systemically important bank, the FDIC would be forced to protect uninsured depositors and stablecoin holders, depleting the Deposit Insurance Fund and increasing moral hazard.
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