Stablecoin-on-Creditor Violence

The GENIUS Act of 2025 rewrites the priority and estate-property rules that govern the failure of a payment stablecoin issuer. It removes an issuer's required reserves from the bankruptcy estate and grants stablecoin holders a superpriority, capped at any reserve shortfall, over what remains. The commentary so far asks what happens inside bankruptcy once an issuer files—whether holders are actually paid and whether the case can be administered. This article identifies a different problem that arises before a filing. Because reserve assets leave the estate the moment they back a coin, a distressed firm can issue stablecoins to subordinate its existing creditors, hollow out the value a future administrator would need, and, when the firm is a bank, shift losses onto the deposit insurer and potentially the taxpayer. We call this stablecoin-on-creditor violence, drawing an analogy with the phenomenon of creditor-on-creditor violence that began with the 2016 J. Crew dropdown. Unlike in that episode, the stablecoin dropdown is on a statutory footing, meaning it is largely beyond the reach of the doctrines courts use to police its private-law cousins. We show that the subordination is accomplished by the rule carrying reserves out of the estate rather than by the celebrated superpriority. We raise concerns for financial stability: The threat of a dropdown grows with a firm's holdings of safe assets, meaning that creditors may respond negatively to a firm with a more liquid balance sheet. The harm is gravest when the subordinated creditor is the FDIC or another deposit insurer, because losses can be imposed on the rest of the financial system and the taxpayer. Importantly, the problems we raise do not rely on there being any investor demand for stablecoins. We close with a menu of responses and recommend a layered fix that federal regulators could largely implement on their own.