CryptoSlate
The Federal Reserve's proposal gives supervised payment stablecoin issuers 24 hours to notify the Fed and submit a plan if reserves fall below outstanding tokens. Unless the shortfall is closed or the Fed directs the issuer to continue remediation, liquidation and redemptions must begin by 5 p.m. the next business day, a window the Fed says is under 48 hours in many cases. Issuers may keep minting during that period.
Why it matters
The proposal sets up a trade-off between containing losses and avoiding a public alarm. On a transparent blockchain, an abrupt halt to minting could signal distress and prompt holders to exit. But continued issuance can bring new buyers into a token with an existing reserve gap. The Fed is asking whether minting should instead be capped or stopped as soon as reserves fall below the 1:1 threshold.
The proposal's example shows how par redemptions can deepen the shortfall for remaining holders. A stablecoin with $100 million outstanding and $95 million in reserves starts at $0.95 of backing per token. If $35 million is redeemed at par, $60 million in reserves remains against $65 million in tokens, or about $0.92 per token. Forced liquidation is intended to put holders on a pro-rata basis before early exits worsen the position of those who remain.
Market impact
The Fed's approach differs from the OCC's March proposal for issuers it supervises: the OCC would immediately prohibit net new issuance below minimum reserves, then require liquidation only if the shortfall lasts 15 consecutive business days, subject to extension. The rules could therefore vary by regulator under the GENIUS Act.
A run could also move through secondary markets when direct redemptions or banking rails are constrained. During the March 2023 banking crisis, USDC fell as low as $0.86 after $3.3 billion of its reserves were trapped at Silicon Valley Bank. A large wave of redemptions could pressure order books, push holders toward other stablecoins or Bitcoin, and eventually force sales of Treasuries or repo assets. The Fed's comment period lasts 60 days once the proposal appears in the Federal Register.
Frequently asked questions
-
How quickly would a Fed-supervised issuer have to respond to a reserve shortfall?
The issuer would have 24 hours to notify the Fed and submit a restoration plan. If the gap is not closed or the Fed does not direct otherwise, liquidation and redemptions must begin by 5 p.m. the next business day.
-
Why would the Fed allow stablecoin minting during the response window?
The Fed says a sudden minting halt would be visible on-chain and could alert holders to distress, accelerating a run. Continued issuance, however, may expose new buyers to an existing reserve shortfall.
-
How can par redemptions worsen a stablecoin reserve shortfall?
In the Fed's example, $100 million in tokens backed by $95 million in reserves starts at $0.95 per token. After $35 million is redeemed at par, $60 million backs $65 million in remaining tokens, about $0.92 each.
-
How does the OCC's proposed response differ from the Fed's?
The OCC proposed stopping net new issuance immediately when reserves fall below minimums. Liquidation would follow only if the shortfall persisted for 15 consecutive business days, a period the OCC could extend.
-
What happened to USDC during the 2023 banking crisis?
The seed says $3.3 billion of USDC reserves were trapped at Silicon Valley Bank. USDC fell as low as $0.86 on secondary markets while its primary redemption channel was largely shut over the weekend.
CoinDesk
WatcherGuru
CoinTelegraph
TheBlock
WuBlockchain