The Genius Act and Stablecoins have blasted into the lexicon spurring strategic thinking of community bankers. While it may seem like an “all of a sudden” event, this has been brewing for quite some time. Certainly, having The GENIUS Act signed into law in July sparked a flurry of “what does this mean” reaction from bankers. I have seen stories that detail the unbelievable opportunities the Act brings, including for community bankers, and stories portending the negative outcomes for banks, nay even that it amounts to an Armageddon type of event. The truth lies somewhere in between those extremes. Let’s first understand that while the GENIUS Act was signed in July, there is a significant amount of work to do in order to provide the regulatory structure that will dictate exactly how the elements detailed in the Act will become reality. Every time the OCC or other regulators decide how a component of the Act will be implemented, the “rules of the game” will change. It’s difficult to get too excited about a game where the rules are still in formation, but smart bankers will get up to speed on the likely outcomes surrounding Stablecoin (and Tokenized Deposits, more about that later …). With the disclaimer that all of what I am about to share is subject to change (and changes and insight on Stablecoins seem to be coming daily), here is a high-level overview of the GENIUS Act: Formalizes who can be an issuer of a StableCoin Pegs Stablecoin to USD 1:1 Requires issuers to have reserves in cash or short-term US Treasuries Establishes regulatory audit and oversight of Issuers Establishes minimum technical and operational requirements for Issuers Prohibits Stablecoin holders from receiving interest or yield on coins Prohibits Stablecoin reserves from being hypothecated (i.e.: no lending or investment) This is by no means a comprehensive list, just the high-level facts of the Act. FNBB will be providing more extensive education on the GENIUS Act and Stablecoins through our FNBB Services Corp. webinar series early next year. View webinar series details here. Essentially a Stablecoin is pegged to the US Dollar and operates on the blockchain. As such, it can be used to make purchases through any mechanism that enables two parties to transaction (i.e.: a digital wallet). So, what are the opportunities that might exist for a community bank? Let’s first talk about the activities that would warrant using a digital currency to make a purchase: Buying other forms of cryptocurrency Mobile “in-app / in-game” purchases (i.e.: purchasing a larger cannon or jumping to additional levels in an online/mobile gaming app …) Doing a transaction where anonymity might be valued (i.e.: cannabis dispensary purchase) If you are looking at that short list and wondering how many of your customers would be engaged in those activities, you are not alone. One of the biggest questions is what customers that are already banking with our institution need or want a Stablecoin. I have two responses to that: 1) we cannot predict just how ubiquitous StableCoin might get. Could it become the de facto method of general transactions, similar to how we use credit and debit cards today? Maybe, and if it does, then it would be wise for a financial institution to not be late to that party. 2) If you looked at the list of use cases above and thought, those look like activities that younger people would be doing, I agree. All FIs are struggling with how to attract and keep younger customers. If it is important for your institution to make the average age of customers lower, then you might be smart to pay attention to the types of payments that are likely to be more attractive to younger customers. What then would be the potential opportunities for a community bank? I think the list includes the following: Having Stablecoin deposit accounts. This would mean that core systems would create a new deposit account designated as Stablecoin. This opens up the options for existing transaction enablement to include a Stablecoin payment. Enable Stablecoin transactions. This would entail providing a branded digital wallet that can be integrated into online/mobile banking apps or offered as standalone app option. Have a subsidiary become a Stablecoin issuer. The GENIUS Act prohibits banks from issuing Stablecoins but non-bank holding company subsidiaries can. All of top U.S. FIs will be issuing coins. What will the impact be for community banks if this is yet another option driving younger customers to Wells, BofA, Citi and JPMC? Perhaps a community bank issuing its own Stablecoin is not technically feasible, but there are partnering options with existing Stablecoin entities like Circle, which offers the USDC Stablecoin. These should be explored to see what that partnering model looks like. Just know that all of the major Fintech companies will be aggressively pursuing Stablecoin options. Venmo users can already see the PayPal digital coin option when they are sending and receiving payments. It’s coming, whether you see it as an opportunity or threat. Additional issues are still in the “work in progress” stage. Will Fintechs be held to the same regulatory scrutiny as banks? Will the law be tightened to restrict entities from offering rewards and other incentives that go around the prohibition on paying interest or yield? And if you want to really stay awake at night, consider the prospect of some number of deposits, perhaps significant amounts, leaving the bank to be used as reserves for Stablecoin. Lower deposits mean less money to loan out in your community. Add to the discussion the subject of a tokenized deposit, which is essentially a digital representation of an account held at the bank that can be fractionally divided and used for payments. Not much is known about the real use case for Tokenized Deposits. I can see where an asset like a painting or a building could be tokenized and the digital ability to fractionally divide ownership, but it is a bit cloudy how a Tokenized Deposit would function differently than a Stablecoin. More work will be needed to fully understand the role and value of a Tokenized Deposit. It just is another example of the myriad elements and information that is unfolding in real-time. FNBB is committed to continually studying the impact and opportunities of The GENIUS Act and Stablecoin. Much more will be forthcoming on this topic, and I highly encourage you to be looking for future articles and education on this topic. In the meantime, if you would like to schedule a briefing on the GENIUS Act and Stablecoin for your institution, reach out to your Relationship Manager, and we will setup an online meeting. Resources https://thefinancialbrand.com/news/payments-trends/new-stablecoin-law-changes-financial-landscape-and-gives-u-s-a-jump-on-europe-191585