Here's Why Stablecoins Should Be FDIC Insured

Currently, stablecoins are not FDIC insured. Read this article to discover the many reasons that stablecoins should be FDIC insured.

Josiah Makori
By Josiah Makori
Joel Taylor
Edited by Joel Taylor

Published August 1, 2022.

To be FDIC-insured simply means that, if you hold assets of up to $250,000 in a financial institution and the institution fails or becomes bankrupt, the Federal Deposit Insurance Corporation (FDIC) refunds all the losses you incur. If you have an individual account with more than $250,000, you must spread it into several FDIC-insured banks to qualify for FDIC insurance.

Luckily, you don’t need to apply for or buy FDIC deposit insurance. You automatically qualify for coverage when you open a deposit account at an FDIC-insured financial institution.

Are Stablecoins FDIC Insured?

Currently, stablecoins are not FDIC insured. However, a decentralized insurance program similar to traditional deposit insurance can be created. Projects that wish to participate can give information about their tokens’ stability mechanisms and reserve portfolios, similar to the supervisory assessments the FDIC applies to gauge a financial institution’s general condition.

Once the stablecoin structure has been assessed and its potential risks better understood, the FDIC can classify it into the appropriate risk group to determine the fee the project needs to pay.

Benefits of Blockchain

Since stablecoins run on a blockchain network, the FDIC can leverage this technology for its insurance program to improve efficiency, cut costs, and increase transparency. Furthermore, the agency can issue a stablecoin insurance token on a permissioned blockchain and only give access to stablecoin projects that have completed a risk evaluation.

Like in deposit insurance, FDIC can place the money it collects in a stablecoin investment fund to ensure public trust and bail out failed projects. Projects that don’t join would be disqualified, further assisting in preventing potential problems, like those caused by TerraUSD.

Why Should Stablecoins Be FDIC Insured?

Stablecoins should be FDIC insured because they present three risks to the financial industry, the economy, and investors:

  1. Loss of value/risk to the holders
  2. Payment system risk
  3. Systemic risk

The news that TerraUSD, one of the biggest algorithmic stablecoins with a market capitalization of over $18 billion, broke its peg to the US dollar resonated throughout the financial markets in May. Considering the increasing importance of stablecoins, which have seen an incredible surge in total supply in the last three years to almost $180 billion, regulators should ensure the responsible development of cryptocurrencies.

Therefore, agencies like FDIC and SEC should formulate policies and measures for mitigating the above risks while backing innovation that improves efficiency, minimizes expenses, and increases financial inclusion.

In conclusion, stablecoins should be FDIC insured if they genuinely want to be the future of commerce.