A key banking regulator in the US, the Federal Deposit Insurance Corporation (FDIC), is examining if it can extend its insurance coverage to stablecoins. The proposal is still under consideration, and the timeline for when it is to be implemented is unclear.
The proposed coverage would insure the holders against losses of up to $250,000 were the bank with the collateral to fail. Ongoing discussions are being progressed under the larger debate around other potential regulations around stablecoin. The Biden administration proposes to institute regulations similar to those for banks to cover issuers of stablecoin.
What are stablecoins?
Stablecoins are cryptocurrencies. They are intended to trade at par with the regular US fiat currency – the US dollar. Typically, cryptocurrencies have traditional financial assets such as cash backing them. Under such arrangements, they are redeemable against cash. Of late, stablecoins have been under the spotlight over the nature of their backing. The stablecoin issuers do not enjoy the same protection that crypto exchanges enjoy when banking in the US exchanges.
The Proposed Coverage
The proposed insurance coverage might throw up some challenges for the issuers. Usually, the issuers identify their customers either while they are depositing cash for stablecoins or when they redeem their tokens. However, since stablecoins run on blockchain networks, anyone with a non-blacklisted crypto wallet can send/receive stablecoins to/from other wallets. The FDIC must institute safeguards to ensure that its overall mission is not compromised. The overall mission being the safety of the deposit insurance fund(DIF).
Were the proposal to be implemented, the deposit insurance would apply only if the bank issuing stablecoins or the one that was banking an issuer went into receivership.