Fed Stablecoin Rule Could Force Liquidation Within 48 Hours
Crisis clock set to 48 hours
The Federal Reserve has proposed strict new rules for stablecoin issuers it supervises. Under the plan, if an issuer's reserves drop below the value of its tokens, it has only 24 hours to notify the Fed and submit a plan to fix the shortage. If the gap is not closed or the Fed does not approve a delay, the issuer must begin selling assets and redeeming tokens by 5 p.m. on the next business day.
This timeline means a full liquidation process could start in less than 48 hours. The goal is to prevent a situation where early users cash out at full value while later users suffer losses.
How the rescue window works
- Issuers must ensure their reserve assets always equal or exceed the value of outstanding tokens.
- If a shortfall occurs, the issuer has one business day to report and propose a fix.
- Liquidation begins automatically the following day unless the Fed intervenes.
- During the 24-hour rescue window, issuers are allowed to keep creating new tokens.
Why minting continues during a crisis
The proposal allows issuers to keep minting new stablecoins during the emergency window. The Fed notes that blockchains are public. If an issuer suddenly stopped creating new tokens, it would be visible on the blockchain and might panic users, causing a faster run on the funds. Continuing to issue tokens helps hide the distress signal while the issuer tries to raise capital.
However, closing the actual money gap requires new cash, recovering lost assets, or a rise in asset values. If the market is scared, finding buyers for new tokens becomes difficult.
Pro-rata losses protect remaining holders
The rules aim to force "pro-rata" liquidation. This means all holders share the loss equally rather than letting the first people to leave get paid in full. The Fed provided an example: if a stablecoin has $100 million in tokens but only $95 million in reserves, every token is worth $0.95. If some users redeem their tokens for $1 each, the remaining tokens become even less valuable. Forced liquidation ensures everyone gets the same reduced amount based on the remaining assets.
Different rules from other regulators
The Office of the Comptroller of the Currency (OCC) has a different approach. Their proposal requires issuers to stop creating new tokens immediately if reserves fall short. They also allow 15 business days to fix the problem before forcing liquidation. Since the Fed and OCC supervise different companies, these two sets of rules could apply side by side depending on who oversees the issuer.
Lessons from past bank failures
The Fed's proposal references research on the Silicon Valley Bank collapse in March 2023. At that time, Circle, the company behind USDC, had $3.3 billion trapped in the failed bank. This caused USDC to lose its value temporarily, dropping as low as $0.86. The new rules are designed to handle such scenarios more quickly to prevent similar market shocks.
Public feedback period
The Federal Reserve will accept comments on this 392-page proposal for 60 days after it is published in the Federal Register. The agency is specifically asking whether issuing new tokens should be banned immediately when reserves fall below the required level.
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