On July 18, former President Donald Trump enacted the aptly named GENIUS Act. Should this legislation disrupt the financial landscape as many predict, its title will serve as a darkly ironic reminder of the folly in allowing the cryptocurrency sector to set its own regulations.
Stablecoins: A Regulatory Framework for a Risky Asset
The Guiding and Establishing National Innovation for U.S. Stablecoins Act aims to implement a regulatory structure for stablecoins, a type of cryptocurrency designed to maintain a stable value, typically pegged to the U.S. dollar. Despite their seemingly secure nature, stablecoins may pose significant risks to the financial system, primarily because their perceived stability is misleading.
The Illusion of Stability in Cryptocurrencies
While many are aware of the volatility associated with cryptocurrencies like Bitcoin and Ether, which can swing dramatically in value, stablecoins promise to eliminate such fluctuations. However, their stability could represent an even greater threat to the broader financial ecosystem. Similar to the Markets in Crypto-Assets regulation adopted by the European Union in 2023, the GENIUS Act introduces measures that may expand the stablecoin market drastically. If these coins fail, the U.S. government could potentially be forced to bail out their issuers and holders at a staggering cost that could reach hundreds of billions of dollars.
The Ominous Reality of Financial Risk
The phrase “this time it’s different” often signals impending financial disaster. A historical example is the early 2000s when the financial industry believed it had created a risk-free asset by bundling subprime mortgages into triple-A-rated bonds. However, when these bonds collapsed in 2007, it triggered the most severe recession since the 1930s. Stablecoins exhibit a similar deceptive quality, transforming high-risk assets into seemingly safe investments, with potentially disastrous outcomes.
Unreliable Promises of Stability
A $100 investment in stablecoin is expected to be worth $100 in the future, making it an appealing option for digital fund storage. They are designed to provide the security and liquidity akin to bank deposits but within the realm of cryptocurrency.
The Great Crypto Crash and Its Implications
However, the assurances of stability have often proven unreliable. Numerous stablecoin issuers have failed over the past 11 years, resulting in the loss of billions in investments. For instance, the collapse of the Terra stablecoin in May 2022 wiped out nearly $60 billion in assets. Economist Jean Tirole has noted that, like money-market funds, stablecoins can appear secure yet may crumble under pressure.
Regulatory Measures and Their Flaws
The GENIUS Act, set to take effect by January 2027, aims to mitigate risks associated with stablecoins by imposing regulations intended to bolster investor confidence. Nonetheless, these measures seem to primarily safeguard the profits of stablecoin issuers while failing to adequately protect consumers and taxpayers. This could lead to more significant and damaging failures in the stablecoin sector when they eventually occur.
The Myth of Technological Superiority
Proponents of stablecoins argue that they provide a more efficient means of transferring and storing funds compared to traditional banking methods. However, this assertion is misleading. Cryptocurrencies are susceptible to fraud, theft, and hacking, making them unreliable for lawful transactions. In the first half of 2025 alone, nearly $3 billion in cryptocurrency was reported stolen.
Limited Use in Everyday Transactions
Furthermore, most cryptocurrency owners do not utilize these digital assets for transactions. A 2023 survey by the Federal Deposit Insurance Corporation indicated that only 3.3% of U.S. households with crypto assets use them for payments, while merely 2% spend them on goods in the traditional economy.
Bypassing Regulatory Oversight
The primary advantage of stablecoins lies in their ability to provide access to the U.S. dollar system (with 99% being dollar-pegged) while circumventing conventional U.S. regulatory requirements, such as “Know Your Customer” laws. The GENIUS Act claims to enforce these regulations on issuers within the U.S., but tracking stablecoin transactions after issuance remains a challenge.
Potential for a Financial Crisis
Currently, the inherent risks associated with stablecoins have limited their appeal to investors, keeping the market size between $280 billion and $315 billion—small enough that its collapse would not severely impact the U.S. financial system. However, analysts at Citigroup predict that under the GENIUS Act, the stablecoin market could balloon to $4 trillion by 2030, which could lead to widespread repercussions in the global financial landscape if a failure occurs.
Regulatory Gaps and Historical Precedents
Stablecoin issuers operate as deposit-taking institutions without the protective measures in place for banks, such as deposit insurance and routine audits—only the largest issuers are subject to annual inspections. This lack of oversight could rekindle some of the worst practices from the early days of American banking, leaving depositors vulnerable.
Promises of Safety with Hidden Risks
The GENIUS Act intends to mitigate risks by requiring stablecoin issuers to back deposits with liquid assets like U.S. dollars or short-term Treasuries, along with monthly disclosures about their reserves. While these measures sound promising, backing coins with low-yield, short-term assets may not be financially beneficial for stablecoin issuers, who will likely seek higher returns.
The Dangers of Interest Rate Fluctuations
By allowing issuers to invest in Treasuries with maturities of up to 93 days, the GENIUS Act exposes stablecoin holders to interest rate risk. As interest rates rise, the value of these bond holdings can decline. If a stablecoin issuer backed by depreciating Treasuries faces a liquidity crisis, it may struggle to meet withdrawal demands, leading to a digital bank run.
Absence of Deposit Insurance
Unlike traditional banks, stablecoin issuers do not provide deposit insurance, relying solely on the value of their assets, which can vary greatly. This lack of a safety net means that early warning signs of trouble may come too late to prevent a larger financial disaster.
Disclosure Requirements and Their Limitations
Supporters of the GENIUS Act assert that it addresses these risks by mandating diversified asset holdings for stablecoin issuers. However, the reliance on these disclosures places the burden of vigilance on consumers, and the information provided may lag behind the real-time needs of a rapidly moving financial market.
The Threat of Bank Runs
This combination of inadequate information, weak regulation, and absence of insurance creates an environment ripe for anxiety, potentially leading to bank runs. Should the GENIUS Act succeed in encouraging global investors to hold more U.S. dollar assets in stablecoins, any hint of negative news could spark a crisis, leading to a rush to liquidate assets that would subsequently lower Treasury values and raise interest rates.
Rising Concerns Over Tether
Tether, based in El Salvador, recently disclosed that its U.S. Treasury holdings have reached $135 billion, positioning it as a significant player in the American debt market. The company previously experienced a bank run in May 2022, and as its assets continue to grow, the repercussions of any failure to meet U.S. dollar obligations will be increasingly difficult for the government to overlook.
Regulatory Shortcomings and Persistent Risks
Although the GENIUS Act prevents issuers from holding certain high-risk assets, it does not eliminate the fundamental issue of stability. The allure of stablecoins lies in their liquidity; however, issuers are incentivized to back these coins with assets that yield returns yet fluctuate in value. Tether’s CEO recently indicated plans for a fundraising round that could value the company at approximately $500 billion.
The Risk of Implicit Guarantees
The ideal scenario for financial institutions is to avoid insurance costs while benefiting from the perception of being “too big to fail.” This was evident during the 2008 financial crisis, where money-market funds received a federal bailout despite not paying for protection against failure. A similar outcome could be expected for stablecoins.
Wider Implications of Cryptocurrency
The ongoing debate around the risks and benefits of cryptocurrencies continues, with advocates viewing it as the future of money while critics liken it to a fraud scheme. For many, these discussions seem distant, as the impact of cryptocurrency has yet to significantly influence the broader economy. The collapse of the crypto exchange FTX in late 2022 sent shockwaves through the crypto world, but it did not substantially affect the overall U.S. economy.
Stablecoins and Their Role in the Financial System
Stablecoins, however, are crafted to integrate with the traditional financial system. One of the aims of the GENIUS Act is to foster a new market for U.S. Treasuries, potentially enhancing the dollar’s status as the global reserve currency. Given the growing U.S. debt, increased demand for Treasury securities could help stabilize interest rates for taxpayers.
Concerns Over Illicit Activity
Yet, this demand may come from dubious sources. The secretive nature of stablecoins attracts individuals seeking to hold U.S. dollar assets without the scrutiny of traditional banking systems. Estimates suggest that around $36 trillion in global wealth is associated with illicit or hidden assets, raising concerns about the implications of facilitating such holdings.
The Path to Legislative Approval
The passage of the GENIUS Act through Congress was decisive, with votes of 68–30 in the Senate and 308–122 in the House. Advocates attribute this success to the determination of those poised to benefit from the legislation and the complacency of those who could face adverse effects. Despite the risks posed by stablecoins to traditional banks, the banking sector has largely underestimated the threat, believing they are safeguarded by restrictions on interest payments to stablecoin issuers.
Potential for Collaboration with Traditional Banks
In a surprising twist, established banks like Bank of America and Goldman Sachs are exploring the idea of creating their own stablecoins, leveraging their reputations to attract depositors wary of the risks associated with other issuers. While their prestige may not shield them from past mistakes, it could facilitate their access to federal support in case of a crisis.
The Influence of Political Contributions
Supporters of the GENIUS Act have benefited from a broader climate of optimism surrounding cryptocurrencies. The crypto sector’s influence in Congress has been bolstered by a successful year for crypto investors, while opponents, including Senator Elizabeth Warren, have raised concerns about the financial interests of President Trump’s family in the industry more than the broader implications of stablecoins.
Corruption and Systemic Risks
Senator Warren’s concerns about the rapid enrichment of Trump and his family through cryptocurrency dealings are valid, as recent reports indicate that crypto operators have funneled over $1 billion in profits to them in the past year. These financial ties have led to a decline in investigations into cryptocurrency fraud, further complicating the regulatory landscape. Trump’s family venture, World Liberty Financial, has even launched its own stablecoin, USD1, which positions them to profit from any increased adoption of stablecoins.
The Growing Threat of Financial Instability
As the cryptocurrency market expands, the potential for significant shocks grows. Recently, the industry experienced its largest one-day loss in history, triggered by President Trump’s tariff threats against China, prompting speculation about insider trading and leading to a temporary suspension of deposits on some exchanges. For now, the separation between the crypto sector and the broader financial system remains intact, but this disconnect is unlikely to last.
The Need for Proactive Regulation
History suggests that the U.S. government will eventually be unable to overlook a major default within the stablecoin market. However, the GENIUS Act lacks the necessary tools to avert such a situation. There is still time to mitigate these risks before the act takes effect in 2027, such as treating stablecoin issuers like deposit-taking entities and mandating them to secure deposit insurance.
Addressing the Cost of Money Transfers
Additionally, lawmakers should tackle the regulatory and anti-competitive factors contributing to high international money transfer costs. For instance, the exorbitant fees charged by services like Western Union provide a compelling argument for cryptocurrency as a more efficient alternative, even if that is not entirely accurate.
Lessons from Past Financial Crises
Reflecting on the aftermath of the 2008 subprime crisis, investor Jeremy Grantham once remarked that while the immediate lessons might be learned, the longer-term insights often fade away. The emergence of stablecoins, reminiscent of the risks associated with subprime-mortgage securities, highlights how quickly we can forget the lessons of past financial upheavals.
The Dangers of Speculation with Other People’s Money
In a free society, individuals should be allowed to engage in speculation using their own funds without interference. The real danger arises when speculative activity involves other people’s money, which is the fundamental nature of stablecoin issuance, a situation exacerbated by the GENIUS Act. The legislation, backed by the Trump administration and a compliant Congress, may have lit a fuse that could lead to America’s next financial crisis if not addressed promptly.
