redemption expectations. Pending regulations are expected to clarify further requirements for redemption. Fourth, importantly for banks, stablecoin issuers are not permitted to pay any interest on the stablecoins they issue. But the GENIUS Act leaves open the possibility of an issuer partnering with third parties to offer other kinds of financial rewards or incentives to such issuer’s coinholders. We anticipate that the contemplated regulations will provide further guidance in this area. Recent comments from the OCC suggest that federal regulators may not feel compelled to implement restrictions on stablecoins that receive interest-like benefits. Bankers should keep apprised of developments in this area and work with advocacy groups to preserve the value of this statutory limitation. Finally, stablecoin issuers may not comingle reserve assets backing stablecoins with other assets or use deceptive terms in marketing, such as representing that their stablecoins are backed by the full faith and credit of the U.S., guaranteed by the U.S. government or covered by federal deposit insurance. Misrepresentation is subject to civil penalties. With these rules in mind, what impact could payment stablecoins have on a bank’s traditional deposit-taking and lending functions? Mainstream adoption of stablecoins could shift dollars out of bank deposits and into stablecoin wallets and Treasuries. This would likely reduce the available credit supply because dollars that would otherwise fund lending through bank deposits would migrate to cash or government securities that are not used for extending credit within a bank’s market. Additionally, mass redemptions of stablecoins that mirror traditional bank runs could result in reserves migrating quickly out of banks that are holding deposits for stablecoin issuers. Maintaining public confidence in stablecoins is critical to preventing runs on issuers. Unlike a bitcoin valuation crash, a run on stablecoin issuers would have a significant market impact because it could cause either a mass sale of Treasuries, thereby depressing the market price of Treasuries, or a second order run on banks to the extent that stablecoin reserves are stored with depository institutions. Regardless of whether banks elect to issue stablecoins themselves, many will have customers who seek to use stablecoins for regular transactions, especially companies that regularly engage in international trade. Understanding these rules and the operational mechanics of payment stablecoins will be crucial for banks to serve such customers. The GENIUS Act represents the federal government’s first significant foray into cryptocurrency regulation. Importantly, the primary federal regulators will issue regulations addressing several key components of the act in the months ahead. The GENIUS Act takes effect on the earlier of Jan. 18, 2027, or 120 days after the primary federal stablecoin regulators issue final regulations. These regulations must be issued by July 18, 2026. Between now and then, bankers should stay informed about payment stablecoin developments and remain involved with their local banking associations. Bankers should continue to educate themselves on the potential impact of stablecoins on core banking functions. They should also advocate to hold the line on the prohibition of yield-bearing stablecoins. Among other things, this will mean seeking additional prohibitions on third-party alternatives (or workarounds) to the interest prohibition, such as rewards programs for the holders of certain stablecoins. Jordan C. Maddy is an attorney in the Morgantown, West Virginia, office of Bowles Rice LLP. His practice involves a wide variety of transactional matters, including mergers and acquisitions and commercial finance. Email Jordan at jmaddy@bowlesrice.com. Benjamin R. Thomas is a partner in the Charleston, West Virginia, office of Bowles Rice LLP. He focuses his practice in the areas of mergers and acquisitions and commercial and financial services. Email Ben at bthomas@bowlesrice.com. Bankers should continue to educate themselves on the potential impact of stablecoins on core banking functions. 10 WEST VIRGINIA BANKER
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