If you watch or read the news, stablecoin is featured nearly daily in the headlines. Some sing its praises, others say it is the end of community banking. But most, if they’re being honest, don’t really know a lot about stablecoin. That shouldn’t be a surprise, considering how much has changed since stablecoin’s initial introduction.

Investopedia defines stablecoin as “cryptocurrencies whose value is pegged, or tied, to that of another currency, commodity or financial instrument.” We now know that the value to which stablecoin is “pegged” is the United States dollar. We have also seen the GENIUS Act (S. 1582) signed into law with the intent of creating a regulatory framework to manage stablecoin. The GENIUS Act itself is 48 pages; a little too long to talk about in detail in this article, but let’s look at the broader points before tackling some of the more narrow concerns.

Congress.gov summarizes the GENIUS Act as, “Under the bill, only permitted issuers may issue a payment stablecoin for use by U.S. persons, subject to certain exceptions and safe harbors. Permitted issuers must be a subsidiary of an insured depository institution, a federal-qualified non-bank payment stablecoin issuer, or a state-qualified payment stablecoin issuer.

“Permitted issuers must be regulated by the appropriate federal or state regulator. Permitted issuers may choose federal or state regulation; however, state regulation is limited to those with a stablecoin issuance of $10 billion or less.

“Permitted issuers must maintain reserves backing the stablecoin on a one-to-one basis using U.S. currency or other similarly liquid assets as specified. Permitted issuers must also publicly disclose their redemption policy and publish monthly the details of their reserves.

“The bill specifies requirements for (1) reusing reserves; 

(2) providing safekeeping services for stablecoins; and 

(3) supervisory, examination and enforcement authority over federal-qualified issuers.

“The bill allows foreign issuers of stablecoins to offer, sell or make available in the United States stablecoins using digital asset service providers, subject to requirements, including a determination by the Department of the Treasury that they are subject to comparable foreign regulations.

“Under the bill, permitted payment stablecoins are not considered securities under securities law. However, permitted issuers are subject to the Bank Secrecy Act for anti-money laundering and related purposes.”

In short, stablecoin is here, and there are now some rules as to how it is to be treated under the law. However, in reading the GENIUS Act, my concern goes to the rarely discussed Section 11 regarding the treatment of stablecoin insolvency proceedings. It states:

(a) IN GENERAL. — Subject to section 507(e) of title 11, United States Code, as added by subsection (d), in any insolvency proceeding of a permitted payment stablecoin issuer under Federal or State law, including any proceeding under that title and any insolvency proceeding administered by a State payment stablecoin regulator with respect to a permitted payment stablecoin issuer — 

(1) the claim of a person holding payment stablecoins issued by the permitted payment stablecoin issuer shall have priority, on a ratable basis with the claims of other persons holding such payment stablecoins, over the claims of the permitted payment stablecoin issuer and any other holder of claims against the permitted payment stablecoin issuer, with respect to required payment stablecoin reserves;

(2) notwithstanding any other provision of law, including the definition of ‘‘claim” under section 101(5) of title 11, United States Code, any person holding a payment stablecoin issued by the permitted payment stablecoin issuer shall be deemed to hold a claim; and 11

(3) the priority under paragraph (1) shall not apply to claims other than those arising directly from the holding of payment stablecoins.

In short, my reading of Section 11 means stablecoins have a super-priority lien in bankruptcy.

The international law firm, Morgan Lewis, put it more succinctly in stating, “Section 11(a) of the Act establishes a general rule that the claims of holders of payment stablecoins to the reserves backing the stablecoins have priority over all other claims in the bankruptcy case. The general rule reinforces a stablecoin holder’s redemption right as creating a ‘hard promise’ by the permitted stablecoin issuer to redeem the holder’s payment stablecoins for fiat currency at the election of the stablecoin holder. The effect of the general rule is to give to the stablecoin holders what is tantamount to a security interest in the reserves to secure the permitted stablecoin issuer’s redemption obligations to the stablecoin holders.

“However, the stablecoin holders are actually treated more favorably than secured creditors in a bankruptcy case. There is no possibility for the debtor issuer under Section 364 of the Bankruptcy Code to obtain credit based on the reserves even if the stablecoin holders are otherwise adequately protected. Not only is the debtor issuer prohibited from granting a security interest in the reserves under Section 4(a)(2) of the proposed Act, but also, under Section 11(e)(3) of the proposed Act, the reserves are not considered even to be included in the debtor issuer’s bankruptcy estate.”

I have not practiced in bankruptcy court for some time, but my reading of Section 11 leads me to believe that being a stablecoin holder leaves you in a better position than any creditor in any form of insolvency.

Why does that matter? In my opinion, if these provisions are not amended, astute depositors will recognize the super-priority position of stablecoin and move traditional cash deposits to stablecoin. That creates a real problem.

The question leading the title of this article is What Lies Ahead? I do not know the answer to that, but I am concerned that if these sections are not amended, it could have serious negative effects on the banking ecosystem. In order to control What Lies Ahead, we must have Section 11 amended to ensure that traditional deposits and security interests are protected. If you find this as concerning as I do, I encourage talking to your legislators about these issues. Your voice matters.