US Considering $250k Deposit Insurance for Stablecoin Holders

October 09, 2021, 10:30 AM AEST - 1 week ago

One of the obvious downsides to participating in the stablecoin market is that there isn’t any deposit insurance for holders. No one is going to bail you out if the custodian goes belly up. However, that may soon change, according to a report suggesting the US government is considering deposit insurance for stablecoin holders.

FDIC Insurance May Apply to Stablecoins

The FDIC (Federal Deposit Insurance Corporation) is an independent agency of the US government that protects against losses if an insured bank fails, up to maximum of US$250,000. Australia has a similar mechanism in place known as the Financial Claims Scheme (FCS), which provides account holders with protection against losses of up to A$250,000.

A number of undisclosed sources close to the FDIC have suggested that stablecoins may indeed be eligible for coverage.

Stablecoins, which are supposed to be redeemable on a 1:1 basis for cash, have been under regulatory scrutiny of late, largely due to the lack of transparency in their reserves composition. While they enjoy the advantage of instant, final settlement, stablecoins are not insured by the government against losses.

Tether revealed in May that only 3.87 percent of its reserves were cash and that over 65 percent was commercial paper. Last month, it asked a court to block the release of its latest reserves, citing “harm to its competitive position”. Circle, the company behind USDC, revealed earlier this year that over 60 percent of reserves were in cash, but in August said it would be moving all of its reserves across to cash and US treasury bonds.

Not Straightforward

A former FDIC lawyer familiar with the inner workings of the organisation notes that:

The FDIC is probably looking at whether stablecoins can count as deposits or whether someone’s ownership of a stablecoin is a deposit at the stablecoin issuer.

Todd Phillips, director of financial regulation and corporate governance, Center for American Progress

Phillips noted that one challenge would be keeping track of who could be insured: “One thing to remember is that each person has insurance of only up to $250,000 … so, the stablecoin issuer would need to keep track of who is the current holder of their stablecoin and how many they own.”

Despite the challenges, Phillips recognised that FDIC insured stablecoins would be a tremendous boost to consumer confidence and trust in the sector.

Just as how the FDIC’s logo on a bank’s website allows savers to be confident that the bank is safe, insurance of particular stablecoins and permission to use the FDIC logo would provide clarity about which stablecoins, up to the insurance limit, will not lose value.

Todd Phillips

Looking into the future, one Twitter commentator had a particularly insightful take on the matter:

Much of crypto’s “wild west” reputation stems from the lack of consumer protection available. Users are often told, quite rightly, to DYOR (do your own research). If, however, the crypto industry is ultimately wanting to “broaden the tent”, FDIC insurance for stablecoins may just be a big step in the right direction.

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