—Nironjan Roy—

US Congress has recently passed a bill, which is called “The Genius Act”, with the objective of streamlining cryptocurrency so that this digital currency can integrate with the mainstream financial system. The experts opine that this Act will provide some legal basis and fundamentals for stablecoins, which are being used as digital dollars in the crypto world. This bill is now waiting for President Trump’s signing off, and it is indicated in the media that Trump has been positive about signing this bill. Once the president’s signing is done, the bill will become an act.

Stablecoins are categories of cryptocurrency which are said to have been designed in such a way that their intrinsic value remains stable. The value of stablecoins is measured in terms of specific assets, which may include fiat currency, commodities or other cryptocurrencies. Fiat currency, on the other hand, is government-issued monetary units which are commonly known as legal tender.

The Genius Act has some special features, of which one is the restriction on paying interest on deposits, while the other is access to the Federal Reserve System (Fed). In general, banks pay interest on deposits if money is kept in interest-bearing accounts. Because banks earn interest at a higher rate on the portion of deposits lent to the borrowers or invest in some other areas. This Act specifically stipulates that stablecoin issuers will be prohibited from paying interest or other forms of earnings to the holder of stablecoins. Similarly, the Act does not say anything restricting stablecoin issuers from getting access to the Fed. So, the Fed can take a decision on allowing access to stablecoin issuers, which will then enjoy the similar status of commercial banks.

The passing of the Genius Act has come as a big blow to the conventional commercial banking system, because many bank mandarins are considering this new act as a threat to banking business. Many experts opined that stablecoins may attract enormous deposit customers from the banking system. As reported in the media, USD 6.6 trillion of funds is feared to be withdrawn from banking deposits and can move to stablecoins. Although insurance on deposit may be one of the great impediments for taking funds from the banking system, the stablecoin issuers may target the fund above the deposit insurance cap, which in the USA is $250,000. Any deposit above this cap does not get insurance protection, so the customers with money above this cap may be easy targets for stablecoin issuers.

Restriction on interest payment is another impediment stablecoins may face while attracting customers to their business network. Because the Act does not allow stablecoin issuers to pay interest or part of their earnings on deposit, commercial banks will try to face the new challenge on this point, because without paying interest or earnings, depositors cannot be allured, so banks will have an edge over stablecoin issuers on this legal restriction. However, the extent to whichthis legal binding can be enforced has already become a debatable issue, because other crypto exchanges like Bitcoin and USD Coin have been paying interest, commission, fees, etc. as income on the money kept.

The scope of using stablecoin was very limited, and this cryptocurrency was mainly used for trading in and out of other currencies. The passing of the Genius Act will of course widen the scope and opportunities of using stablecoins. Based on this law, a regulatory framework can be developed that will encourage broader use of stablecoins. Many experts opined that this digital dollar may be used as a mode of quick and cheap payment, especially in settling cross-border trade.

However, this threat may even turn into a big opportunity for banks if relationship business with stablecoin users can be well designed, which the banks are now actively considering. Because banks have vast networks across the world, under relationship management, banks will maintain accounts of stablecoin issuers where significant amounts of funds will be retained at no cost or very low cost, which the bank can invest in many profitable areas. For example, large banks always make good money by maintaining relationship management with small banks, so the banks may apply the same approach to stablecoin issuers.

Whether Genius Act will cause any threat to the commercial banking system remains to be seen in the future. However, it is apparent that this Act may cause severe upheaval in the US financial system, as commercial banks may have to overhaul their business strategy with a view to facing the challenge and competition to be coming from the crypto industry. It is expected that there may be many new products and services in the banking industry with prevailing steep competition in the financial world. Especially cross-border trade may get a new form of transaction settlement. Of course, this new financial structure will first develop in the USA but soon be followed by other parts of the world. So, the countries, irrespective of the developed and developing world, may reap good benefit from this change if they can ensure good preparation. Bangladesh Bank should review this act in detail to explore whether there is any scope and opportunity and act accordingly.

——————————————————————-

The writer is a certified anti-money laundering specialist and banker based in Toronto, Canada. Email: [email protected]