Fed proposes two-day stablecoin redemptions; $76B on exchanges

The Federal Reserve published a proposal in the Federal Register on Sept. 29 after announcing it on Sept. 24. Under proposed section 247.12, a Board-supervised payment stablecoin issuer would have to disclose its redemption procedures and, in normal circumstances, complete a redemption within two business days. The proposal would require issuers to explain how customers can redeem, accept requests for at least one token subject to onboarding and screening, and allow for extensions for safety, financial stability or the public interest. The Board also proposed limited safe harbors for delays tied to required customer checks or circumstances outside an issuer’s control. The requirements are open for public comment.

Researchers at the Andersen Institute for Finance and Economics reported a July 28 snapshot that identified at least $76 billion of 12 reserve-backed dollar stablecoins held in centralized exchange wallets. The institute described that figure as a lower-bound estimate because some exchange wallets cannot be identified. The snapshot attributed $61.5 billion to Tether’s USDT and $10.1 billion to Circle’s USDC, with the remainder in other reserve-backed coins.

The Fed’s proposed two-business-day clock would apply to issuers under the Board’s supervision. Tokens held in exchange wallets are typically subject to the exchange’s withdrawal rules before a customer reaches an issuer. Current issuer and venue terms set different eligibility and minimums for direct redemption. Circle’s terms require an eligible Circle Mint account for direct USDC redemption outside the European Economic Area. Coinbase’s U.S. user agreement says customers own USDC wallet balances but that Coinbase is not obliged to repurchase USDC for dollars and may point customers to Circle for direct redemption. Tether’s terms require a verified customer and post a $100,000 minimum for direct redemptions. Those rules limit immediate direct redemptions for many retail users even if an issuer’s redemption window is two business days.

Andersen researchers examined the March 2023 USDC stress episode. Using March 9 as a baseline, they found exchanges held 15.2% of USDC supply but accounted for 40% of the subsequent supply decline. From March 10 to 13, total USDC supply fell $2.7 billion while identified exchange balances rose $600 million. After March 13, supply fell another $8.1 billion and exchange balances fell $4.9 billion. Wallet-location data do not show the order of individual customer actions, and the researchers said the episode offers limited guidance on how other coins might behave in a future shock.

If an exchange submits a qualifying redemption request to an issuer, the issuer’s obligations under the proposed rule would apply to that request. Determining how the proposal would affect the $76 billion held on exchanges requires mapping each exchange balance to its issuer and reviewing the contractual terms that govern customer withdrawals and issuer onboarding.