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After a flood of crypto industry campaign cash, the U.S. Senate is poised to pass a financial deregulation bill ensuring that when a bank goes out of business, the savings of cryptocurrency owners would be made whole before those of other bank customers.
During a bank collapse, the language buried deep in the bill could effectively require financial institutions to drain money from regular depositors’ savings and checking accounts and give it to cryptocurrency investors to reduce those investors’ losses.
The Senate legislation, known as the GENIUS Act, aims to establish a light-touch legal framework to allow banking and nonbanking institutions, such as cryptocurrency exchanges and even social media companies, to issue a form of cryptocurrency called stablecoins. The bill comes after pro-crypto interests spent at least $4 million since January lobbying Congress, the White House, and regulators on the bill and other matters, disclosures show.
Included in the legislation is a provision declaring that if a bank goes bankrupt or becomes insolvent, “the claim of a person holding payment stablecoins issued by the payment stablecoin issuer shall have priority over all other claims against the payment stablecoin issuer.”
According to Georgetown Law professor Adam Levitin, who specializes in financial regulation, this essentially means that “if a bank custodian for a stablecoin issuer’s reserves ends up insolvent, the claims of the stablecoin investors will come ahead of the bank depositors.”
So if a financial institution goes out of business, it will be legally obligated to first make stablecoin depositors whole, even if it means using what remains of other customers’ money.
“Congress is about to put the claims of stablecoin investors ahead of Ma and Pa’s bank deposits,” Levitan wrote. “In other words, the GENIUS Act is subsidizing stablecoin issuance on the back of bank deposits.”
A “FUBAR Situation”
Stablecoins, a form of crypto token, are supposed to be more dependable for investors because their value is tied to the U.S. dollar. Issuers of these coins are required to hold reserves in various assets — such as stocks, bonds, or even other cryptocurrencies — that can be liquidated to meet a stablecoin depositors’ withdrawal request.
But experts and banking regulators have warned that without proper restrictions, stablecoins could still cause widespread financial chaos and even contagious bank insolvencies, since they’re interconnected with other, more volatile assets, including other cryptocurrencies.
For example, in 2022, the world’s largest stablecoin, Tether, lost its one-dollar value due to the collapse of another cryptocurrency and widespread investor concerns. The 2023 collapse of Silicon Valley Bank, which threatened to wipe out over $40 billion of its customers’ savings, was also due in part to stablecoins.
“We argue that [stablecoins] create interconnections that can amplify shocks in the digital ecosystem and have the potential to spill over into the traditional financial system,” Federal Reserve economists wrote in a November 2024 report.
Many stablecoins likely won’t be covered by the Federal Deposit Insurance Corporation (FDIC), which insures up to $250,000 worth of depositors’ savings if there’s a bank failure, because stablecoins are not considered traditional forms of money. But the GENIUS Act would lead to a “FUBAR situation” if these stablecoins collapse, wrote Levitin, because the law would require institutions to use FDIC-insured deposits to cover the damage.
The Genius Act also stipulates that even non-depository financial institutions that operate like banks, such as highly volatile money market funds, will have to prioritize stablecoin holders over other customers.
“The GENIUS Act is effectively letting FDIC insurance leak out to cover uninsured stablecoins, without any insurance premiums paid,” Levitin wrote in a May 7 blog post. “Whatever the merits of stablecoins, they shouldn’t be subsidized by the banking system.”
Millions In Lobbying
The provision giving preference to cryptocurrency investors over depositors came after the crypto industry delivered millions of dollars to the federal lawmakers now crafting and voting on the GENIUS Act.
The cryptocurrency industry outspent all other industries in this past election cycle, doling out more than a quarter of a billion dollars to help place crypto-friendly lawmakers in Congress and the White House. During his presidential campaign last year, President Donald Trump promised to make the United States the “crypto capital of the planet,” and has already delivered many crypto wishlist items, including installing crypto-friendly regulators, gutting crypto enforcement actions, and establishing Bitcoin reserves.
The crypto industry has also lobbied key regulators and politicians on the GENIUS Act and other issues since January. Coinbase, one of the largest crypto exchanges, spent at least $150,000 lobbying Congress on the bill and other matters. Other exchanges and prominent companies also spent big on lobbying on the bill and other issues: Kraken, an exchange that was accused of helping Iran evade sanctions, spent $520,000, and Tether, a major stablecoin issuer, spent $50,000.
Multiple trade groups spent $588,000 combined lobbying Congress and regulators on the bill and other matters. These groups include the Electronic Transactions Association, the Blockchain Association, and the Crypto Council for Innovation.
Venture capital firm Andreessen Horowitz, which has close ties to former White House adviser Elon Musk and is invested in multiple crypto companies, also spent $80,000 on lobbying.
