New York's financial regulator proposes new stablecoin rules to align with the federal GENIUS Act. The proposal adds custodian concentration limits and risk management requirements to existing rules like 100% reserve backing. This occurs amid a debate over the GENIUS Act's effectiveness, as a loophole may allow affiliates to pay yield, potentially causing trillions in deposit flight from banks.
GENIUS Act yield prohibition
- ▪The federal GENIUS Act, signed into law on July 18, 2025, created the first U.S. federal framework for payment stablecoins
- ▪The GENIUS Act prohibits stablecoin issuers from paying interest or yield on their products to prevent competition with traditional bank deposits
Affiliate yield loophole
- ▪Some market participants, including Paradigm and Hyperliquid, have warned that parts of the GENIUS Act could create unintended consequences for decentralized finance (DeFi)
- ▪The Act's yield prohibition applies only to the issuer, creating a loophole for affiliates or exchanges to offer rewards to stablecoin holders
Deposit flight risk estimates
- ▪An April 2025 Treasury Borrowing Advisory Committee presentation identified $6.6 trillion in transactional bank deposits as vulnerable to migration into stablecoins
- ▪Federal Reserve economists estimated a $1 trillion deposit drain into stablecoins could reduce bank lending by $600 billion to $1.26 trillion
Stablecoin reserve composition
- ▪The rules require monthly reserve report certification by an issuer's CEO and CFO, plus an annual attestation from a public accounting firm
- ▪The proposed NYDFS rules retain core requirements from 2022 guidance, including 100% backing by permissible assets and mandatory independent audits
- ▪A new NYDFS requirement introduces caps on the amount of reserve assets that can be held with a single custodian to reduce concentration risk
- ▪Stablecoin reserve composition varies, with Circle holding roughly 13% of its backing in bank deposits while Tether holds close to none
- ▪Issuers with $25 billion or more in outstanding stablecoins must hold at least 0.5% of reserves, up to $500 million, in insured deposits
White House counterargument
- ▪In an April 2026 report, the White House Council of Economic Advisers argued that stablecoin yield is not a significant threat to bank deposits
- ▪The White House Council of Economic Advisers estimated that removing the GENIUS Act's yield prohibition would increase bank lending by only about $2.1 billion
Regulatory enforcement outlook
- ▪The NYDFS proposal sets a two-business-day limit for redemptions and prohibits rehypothecation of reserve assets and paying interest on stablecoins
- ▪New York's Department of Financial Services (NYDFS) proposed new rules on June 9, 2026, to align its stablecoin framework with the federal GENIUS Act
- ▪A 10-day pre-proposal comment period for the NYDFS rules runs until about June 22, 2026, followed by a 60-day formal comment period
- ▪The key uncertainty for the banking industry is whether regulators will close the affiliate-yield loophole in the GENIUS Act
- ▪The NYDFS proposal requires stablecoin issuers to implement comprehensive risk management programs covering internal controls, cybersecurity, and third-party service providers
- ▪Once finalized, existing New York-licensed stablecoin issuers will have a one-year transition period to comply with the new framework
- ▪In April 2026, the Treasury's FinCEN and OFAC jointly proposed anti-money-laundering and sanctions rules for stablecoin issuers under the GENIUS Act
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