How GENIUS Act opens doors for uninsured banks

Controversy is clustering around the GENIUS Act provision granting state depository institutions national money transmission and custody powers when acting through a stablecoin issuer subsidiary.

Bank trades and state regulators are pushing to repeal the provision, saying it gives preemption power to uninsured banks like Wyoming's SPDI. But how do they know the provision applies to uninsured banks? And why didn't more people notice that sooner rather than later?

The answer lies in the convoluted way the Act defines "state chartered depository institution." The definition's cross-references snake through multiple Federal Deposit Insurance Act definitions. At the end of the path is a phrase familiar to many fintechs that have struggled for payment system access: “eligible to apply to become an insured depository institution.”

Eligibility to apply for deposit insurance is a key that opens many doors in the U.S. payment system. (The graphic has a few examples.) The main criterion for eligibility is being "engaged in the business of receiving deposits other than trust funds."

Here is the path, if you want to follow along:

1️⃣ The GENIUS Act says "state chartered depository institution" has the same meaning as "state depository institution" in the FDI Act. 12 USC 5901(29).
2️⃣ In the FDI Act, "state depository institution" means "any State bank, any State savings association, and any insured branch which is not a Federal branch." 12 USC 1813(c)(5).
3️⃣ "State bank" means a state-chartered "bank, banking association, trust company, savings bank, industrial bank ..., or other banking institution which— ... is engaged in the business of receiving deposits, other than trust funds[.]" 12 USC 1813(a)(2).
4️⃣ Under FDI Act section 5(a)(1), "any depository institution which is engaged in the business of receiving deposits other than trust funds ... may become an insured depository institution" upon application to and examination by the FDIC. 12 USC 1815(a)(1).