When do stablecoins break the bank? A theoretical approach to bank stability under the GENIUS Act

Abstract

This paper investigates financial stability risks to banks from the non-bank stablecoin sector as it is regulated under the GENIUS Act of 2025. I develop an infinite-horizon macroeconomic model of banking based on Gertler and Kiyotaki (2015) that allows for liquidity mismatch and bank runs, expanding the model with a stablecoin sector and a bond market. The issuer is modeled as a value-maximizing agent and its structure is patterned on the regulatory constraints laid out for issuers in the GENIUS Act. I analyze the impacts of stablecoin adoption and higher stablecoin deposit recycling on bank leverage and run conditions. I find that stablecoin adoption increases bank fragility through three balance sheet mechanisms — eroding deposits, increasing leverage for capital investments, and lowering bank bond purchases — while higher deposit recycling can mitigate these effects. I also find that the “super-priority” protection provided to stablecoin issuers in the GENIUS Act is protective for partner banks in cases of bank illiquidity and adverse in cases of insolvency.