The Fed finally moves

The Federal Reserve has published two major proposals implementing its responsibilities under the GENIUS Act, the US law creating a federal framework for payment stablecoins.

The proposals, released on 24 September, cover how Fed-supervised stablecoin issuers must back their tokens, how banks can apply to issue them and what risk-management standards will apply.

Both proposals are now open for public comment.

Stablecoins must be fully backed

The first proposal would require Fed-supervised issuers to fully back their stablecoins with permitted reserve assets.

Those reserves could include short-term US Treasury bills and other high-quality, liquid assets.

The goal is straightforward.

If someone holds a $1 stablecoin, the issuer needs enough liquid assets behind it to reliably redeem that token for $1, including during periods of market stress.

Fed Governor Michael Barr said stablecoins can only remain stable if holders can redeem them promptly at par even when markets or the issuer itself are under pressure.

Banks get a route to issue their own

The second proposal explains how Fed-supervised banks can apply to issue payment stablecoins.

Banks would need to submit information including a business plan, financial data, internal policies and other documentation before receiving approval.

The Fed would also establish formal procedures covering applications, appeals, hearings and final decisions.

That creates a clearer path for traditional banks that want to launch their own regulated dollar tokens.

Capital and risk rules come with it

Issuers would not only need reserves.

The Fed also proposes standardized capital requirements covering credit and operational risks linked to stablecoin activities.

There would also be specific risk-management standards and rules governing firms that custody the assets backing stablecoins.

This pushes stablecoin issuers closer to the type of regulatory framework already familiar to banks and other financial institutions.

The yield question remains important

One of the most controversial parts of US stablecoin regulation is whether platforms can pay rewards to users simply for holding stablecoins.

The GENIUS Act prohibits issuers themselves from paying interest or yield on stablecoins.

The Fed's proposal goes further by addressing arrangements involving third parties that could effectively recreate the same thing indirectly.

Certain third-party reward structures would be presumed to violate the prohibition, according to CoinDesk.

At the same time, regulators appear to be leaving room for narrower incentive programs comparable to credit-card rewards.

That distinction matters for companies such as Coinbase, which have built products around rewarding users for holding stablecoins.

The rules are not final yet

The Federal Reserve is only one part of the GENIUS Act implementation process.

Other agencies, including the Treasury Department, OCC and FDIC, are also developing their own rules.

The Fed's proposals will remain open for public comment for 60 days after publication in the Federal Register.

The rules can still change before becoming final.

Why this matters

The GENIUS Act gave stablecoins a legal framework.

Now regulators are filling in the details that will determine how that framework actually works.

Reserve requirements determine how safe stablecoins must be.

Application rules determine which banks can issue them.

And the interpretation of "yield" could determine whether stablecoins compete directly with bank deposits for consumer cash.

This is the stage where stablecoin regulation stops being legislation and starts becoming infrastructure.

The biggest question is no longer whether the US will regulate stablecoins.

It is what the regulated version of the stablecoin market will look like.