The False Promise of Stablecoins: The Next Time Bomb in America's Financial Crisis
TechFlow Selected TechFlow Selected
The False Promise of Stablecoins: The Next Time Bomb in America's Financial Crisis
Suddenly, we seemed to catch a glimpse of 2008 again.
Navigating Web3 tides with focused insightsBy: Rana Foroohar
Translated by: Block unicorn
Last week, my heart sank when I read that JPMorgan was considering making loans backed by cryptocurrencies held by clients, even though we all knew the day would eventually come when crypto entered the real economy.
Bitcoin, one of the digital assets banks might use as collateral, has been nearly four times as volatile as major indices since 2020. It's also linked to terrorist financing, and I haven't read anything that convinces me it's anything more than a tool for speculators and criminals. But when it has the backing of the biggest political donors, that hardly matters.
In recent years, cryptocurrency political action committees have spent tens of millions of dollars, not only donating to Republican politicians but also to many Democrats. This effort culminated weeks ago with the passage of the Genius Act. Legislation covering other crypto assets is expected later this year. I predict this will not only trigger the next financial crisis but further fuel populism and political instability in the United States.
All of this recalls the year 2000, when over-the-counter derivatives advocates flocked to Washington, pleading for proper "regulation" so they could bring financial "innovation" to the world. The result was a sevenfold expansion of the credit default swap market under inadequate oversight, ultimately leading to the 2008 financial crisis.
Now consider that Treasury Secretary Scott Bessent expects the stablecoin market to grow tenfold in the coming years—from an industry worth nearly $200 billion to $2 trillion—penetrating everything from loan underwriting to the Treasury market.
As Senator Elizabeth Warren, senior Democrat on the Senate Banking Committee, told me last week: "We've seen this movie before," where lobbyists say "please regulate us" because they want government to give them the golden seal of being a "safe" investment, while politicians provide bipartisan support for deregulation.
In fact, you can clearly trace a line from the derivatives deregulation of 2000, to the broader deregulation during the Clinton era that weakened barriers between trading and lending, to the 2018 weakening of Dodd-Frank regulations on regional banks (which contributed to the 2023 banking crisis), and now to the Genius Act. All of it driven by bipartisan consensus.
Warren, elected after voters felt betrayed by mainstream politicians, tried to convince fellow Democrats not to support Republican backing of the Genius Act—but failed.
But money talks. The crypto lobbying group has already demonstrated massive influence by spending $40 million to defeat critics like Sherrod Brown, former Senate Banking Committee chair from Ohio. Although nearly two-thirds of Democratic senators voted against the Genius Act, supporters—including influential Democratic senators like Mark Warner of Virginia and Kirsten Gillibrand of New York—were enough to pass the bill.
This gives me four reasons for concern.
First, the Genius Act (like the 2000 Commodity Futures Modernization Act) is marketed as a way to make crypto safer, with stablecoins backed one-to-one by dollars.
But this doesn't make an inherently volatile asset class any less volatile. In fact, it may simply make the entire market more volatile. Advocates talk about cryptocurrencies like Bitcoin as hedges against traditional markets, but in reality, Bitcoin is a "high-beta" investment, meaning it's highly correlated with the stock market. This means both gains and losses relative to the S&P are amplified. Any beta above one indicates higher volatility than the market. A recent Fidelity report found Bitcoin’s three-year rolling beta is 2.6.
Second, I believe there’s no worse time to encourage financial "innovation" than amid such uncertainty in markets, the economy, and monetary policy.
Imagine if in the coming months or years, the Fed has to sharply raise interest rates due to inflation, causing markets to plummet—as always happens when rates rise. Cryptocurrencies would fall even harder and faster. Financial institutions holding crypto (including many shadow banks) could get into trouble, leading to a freeze in credit markets.
Suddenly, we're seeing echoes of 2008. This leads to my third concern. Supporters of the Genius Act claim it will strengthen the dollar and the U.S. Treasury market. But it's easy to imagine crypto firms like Tether—holding more U.S. Treasuries than Germany—being forced to sell Treasuries in a downturn to cover redemptions. Then you'd see fire sales of Treasuries, rising borrowing costs, and another disastrous scenario where ordinary people face pressure to bail out speculators.
But this time, it happens after more than two decades of growing public skepticism toward politics. Which brings me to my final concern. The financial deregulation pursued by the Clinton administration in the late 1990s laid the groundwork for the 2008 financial crisis and the Democratic Party’s loss of support among working people. That, in turn, paved the way for Trump’s rise.
Trump is now laying the groundwork for our next financial crisis by supporting (and of course trading) cryptocurrencies. What happens when we’re plunged into financial chaos, voter distrust in mainstream politics deepens further, and government has less interest and capacity to cushion economic downturns? There will be no crypto—and no stability.
Join TechFlow official community to stay tuned
Telegram:https://t.me/TechFlowDaily
X (Twitter):https://x.com/TechFlowPost
X (Twitter) EN:https://x.com/BlockFlow_News
@FT
