Stablecoins: Crypto Kryptonite

In parts one and two of this crypto explainer series, I showed how these pseudo-currencies—and their associated block chain infrastructures—are climate-costly contraptions that serve little useful functions, except for some already served more efficiently by our current banking and financial system, despite its imperfections. (See my Busting the Bankers’ Club: Finance for the Rest of Us for a critique of “roaring banking.”) 

Instead, crypto provides unparalleled opportunities for gambling, hiding illegal activities such as drug running, and tax evasion. And despite its dazzling promises, it utilizes some of the oldest financial scams in the book: Ponzi schemes, pump-and-dump ploys, rug pulls, and just plain old theft.

Despite being called a currency, crypto lacks one of the most important characteristics that a currency (money) should have: a stable value. Cryptocurrencies have proved far more unstable in value than other financial assets and certainly more unpredictable than the value of money, which has fallen in recent years by 2% to 3% a year (the rate of inflation). Admittedly, most of the fluctuations have not reached hyperinflation extremes, but some cryptocurrencies have completely collapsed in value, including Terra and FTX (of Sam Bankman-Fried infamy). In fact, according to one estimate, more than 50% of cryptocurrencies have failed since 2021. 

For those who want to expand the use of cryptocurrencies, this flakiness poses serious problems. 

Enter stablecoins.

Stablecoins, as the name suggests, are designed to hold a stable value. They are assets that tie their values to that of another important asset, such as the U.S. dollar. If successfully locked in one-to-one with the U.S. dollar, stablecoins would only vary to the same degree as the dollar does.

Why, might you ask, should we bother? Why not just use the dollars? Good question. The answer reveals what is really going on. 

Stablecoins serve as a stable on-ramp and off-ramp to Cryptoland. If you want to invest in, gamble with, hide your wealth with, or buy drugs with cryptocurrencies, you have to first use your dollars to buy one of the hundreds of cryptocurrencies on a trading platform. What if you want to buy an asset to gamble on its value going up? You will need to exchange your crypto currency for another crypto asset such as an exchange-traded fund (ETF) denominated in crypto that contains a portfolio of assets. When you want to cash in your fund you will sell it for a cryptocurrency. If you want to change it for dollars to buy a yacht, then you might have a problem: the value of your crypto asset might have fallen dramatically relative to the dollar and so you will have to buy a small canoe instead. If you use stablecoins, the value of your off-ramp into Dollarland—the world most of us live in—will theoretically be protected.

Stablecoins promise to expand the market for crypto assets and enhance profits for those who own crypto businesses and crypto assets. This obviously includes the Trump family and their buddies. David D. Kirkpatrick at The New Yorker, using a very judicious approach, estimates that, so far, the Trump family has made a minimum of $3.4 billion from exploiting Donald Trump’s role as president. Of that, 70% ($2.4 billion) has come from crypto-related ventures. And these estimates were published in August. Since then, the Trumps have sealed crypto deal after crypto deal.

What can go wrong? The answer partly depends on how well these stablecoins are regulated and by whom. And that is where the Genius Act and the Clarity Act come in. 

The Genius Act, an Orwellian name for something rather dumb, stands for “Guiding and Establishing National Innovation for U.S. Stablecoins Act.” It was signed into law by President Trump on July 18. It passed the Senate with 50 Republican and 18 Democratic votes and the House with 206 Republican and 102 Democratic votes. The Democratic votes reflected the massive pro-crypto campaign spending that upended the 2024 primaries and elections in favor of pro-crypto candidates and threatened incumbents if they failed to toe the crypto line. 

The Genius Act provides a highly permissive legal framework for wannabe stablecoin purveyors. It allows both banks and non-banks to issue stablecoins. For example, the law allows JPMorgan Chase as well as asset managers like BlackRock and Blackstone to issue stablecoins. It even allows non-financial corporations, such as Amazon or Walmart, to do so as well.  

The Genius Act requires very few regulatory guardrails, compared to both national and local commercial banks. When you put $100 into your checking account, you have the right to withdraw your dollars on demand and the bank is required to give them to you. 

Banks are required to have deposit insurance so that if there is a run on your bank you can still get your money back. They are also required to keep a certain amount of capital on hand, so that if the bank loses money, its owners still have to pay up. Regulatory rules limit the types of assets banks can invest in, to discourage high-risk investments. 

The Genius Act imposes none of these rules on institutions that issue stablecoins. It prohibits them from paying interest on deposits, in order to protect traditional banks from competition, but also allows them to get around these restrictions by offering rewards. So, deposits are likely to flee from banks that are subject to regulations and safeguards to crypto purveyors that aren’t.

Nor is it clear how successful these purveyors will be in maintaining stable links to the dollar. History indicates that this can be a serious problem. 

When local banks issued their own currencies in the mid-19^th century, chaos ensued, as documented by the economic historian Barry Eichengreen. In the era sometimes referred to as “wildcat banking,” shopkeepers and farmers had a hard time determining which currency was stable and which was not, because bank runs became common. As a result, the Lincoln administration enacted several laws to place the national banking system under stricter regulation.

The recent history of stablecoin collapses clearly reveals the need for regulation. Some stablecoins, such as Tether, have been pushed off their pegs to the dollar multiple times, leading to a collapse in the cryptocurrency’s value. The 2023 bank runs on Silicon Valley Bank, Signature Bank, and Republic Bank were partly the result of ties to the crypto industry. 

The Genius Act purports to avoid these problems by requiring stablecoin issuers to keep high-quality assets such as short-term U.S. government Treasury securities on hand to guarantee that depositors will be able to get their dollars back. However, the Clarity Act, which has passed the House and is awaiting approval by the Senate, will lead to the nearly total deregulation of Cryptoland. The legislation guts almost all financial regulations and monitoring mechanisms that could place limits on the system. At the same time, as a law, it creates a patina of legitimacy for “whatever goes” finance. The coalition group Americans for Financial Reform has mobilized efforts to fight this bill, which would undo decades of regulatory law and usher in a new era of consumer abuse and financial instability. 

Perhaps you’re still wondering why so many lobbyists—including President Trump and his family—have fought for the Genius and Clarity Acts. As Bill Black, a financial regulator who witnessed the looting of American Savings and Loans in the 1980s put it, “The best way to rob a bank is to own one.” This slogan can be updated for the crypto/stablecoin era: “The best way to make money is to print money.” 

This is exactly what the Genius and Clarity Acts will enable the Trump family and other powerful organizations to do. And when the going gets tough, they are likely to demand a bailout from the government—which is to say, from you and me.