Nobel Laureate in Economics: Stablecoins May Be Misnamed, with Risks Far Outweighing Benefits
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Nobel Laureate in Economics: Stablecoins May Be Misnamed, with Risks Far Outweighing Benefits
Appears safe on the surface, but highly prone to collapse under pressure.
Navigating Web3 tides with focused insightsSource: The Economist
Translation: Luffy, Foresight News
Thanks to the push from the GENIUS Act, stablecoins have entered mainstream finance. This U.S. law, passed in July this year, established a regulatory framework for stablecoins, granting them legitimacy while paving the way for financial institutions to launch their own versions. World Liberty Financial, a crypto project backed by former U.S. President Donald Trump and his family, has already issued a stablecoin called USD1. Meanwhile, the current market favorite—Tether's USDT—has seen its market capitalization surge 46% over the past 12 months, reaching $174 billion.
These cryptocurrencies, pegged to real-world assets like the U.S. dollar, claim to be more stable than volatile Bitcoin and are marketed as low-cost, high-speed payment tools. However, the risks posed by stablecoins will far outweigh their benefits, and superior alternatives already exist in the market.
Supporters of first-generation cryptocurrencies like Bitcoin come from diverse backgrounds: tech enthusiasts, libertarians seeking freedom from government control, money launderers, and speculators chasing quick riches. These frontier crypto firms thrive primarily on seigniorage (profits from token issuance) and transaction fees (commissions from platform trading).
Critics argue that such cryptocurrencies offer little social value. They facilitate tax evasion, deprive governments of seigniorage revenue, and rely on energy-intensive mining to function. More importantly, they undermine central banks’ ability to stabilize economies during crises and prevent capital flight—especially when economies face speculative attacks. Their extreme volatility also renders them unfit as genuine money.
Stablecoins are presented as a solution to this last issue. By pegging to safe assets like the U.S. dollar, they claim to “combine the efficiency of digital payments with price stability.” They position themselves as competitors to costly incumbent institutions—banks and payment platforms like Visa, PayPal, and SWIFT—particularly in cross-border transfers. At first glance, this appears to be progress. But history has shown that seemingly safe financial innovations often spark crises, just like the packaged derivatives and subprime securities before the 2008 financial crisis.
Stablecoins resemble money market funds: they appear safe on the surface but are highly vulnerable to collapse under stress. In such cases, governments may feel compelled to bail out stablecoin holders to “protect small businesses and household savings,” “prevent systemic risk,” or “maintain a crypto-friendly reputation.” Yet this expectation of government support encourages reckless behavior by stablecoin issuers.
Proponents insist that stablecoins are fully backed by dollar-denominated assets—such as cash, bank deposits, U.S. Treasury bonds, and money market funds—and that accounting firms regularly audit reserve levels, while regulators interpret audit results and enforce necessary oversight. In reality, full backing is far from guaranteed. Tether was previously fined for “misrepresenting its reserves” and has never undergone a comprehensive, independent audit; another issuer, Circle, faced risk to 8% of its reserves due to Silicon Valley Bank’s collapse—only saved because uninsured depositors at that bank ultimately received public support.
Even if reserves exist, any minor doubt about their adequacy could trigger a destructive bank run. The 2022 collapse of the algorithmic stablecoin TerraUSD serves as a stark example. More troubling still, the GENIUS Act’s rules on stablecoin redemption—including key provisions such as “how to handle redemption requests” and “whether payments can be suspended during crises to preserve liquidity”—remain unclear.
Moreover, safe assets like cash and Treasuries yield very little. Historically, even prudently regulated banks have pursued higher returns by investing in risky products disguised as safe assets. So why assume that stablecoin issuers—subject to far looser regulation than banks—will exercise restraint and avoid yield-chasing through interest rate speculation or investing in uninsured deposits?
The GENIUS Act prohibits stablecoin issuers from paying interest—a move aimed at appeasing banks worried about losing deposits to stablecoins. However, this ban does not apply to stablecoin trading platforms like Coinbase and PayPal. This regulatory gap creates loopholes: platforms can partner with issuers while evading the stricter rules imposed on issuers themselves.
Some platforms are exploiting this loophole to offer de facto yields (e.g., Coinbase and PayPal both use cashback mechanisms), taking significant risks to fund these returns. Unlike banks, these platforms are not required to meet capital adequacy ratios or liquidity coverage requirements, nor do they pay deposit insurance premiums. As a result, they operate as shadow banks, benefiting from implicit public backstops without bearing corresponding regulatory costs.
Political factors further amplify stablecoin risks. The current U.S. administration has personal financial interests, ideological leanings, and geopolitical motives in promoting cryptocurrencies. Crypto can boost global demand for the U.S. dollar, helping finance America’s trade deficit. Now, officials sympathetic to the crypto industry are being appointed as regulators, making lax oversight almost certain.
This situation alarms Europe and other regions. If a country attempts strict regulation of dollar-pegged stablecoins, the Trump administration might label it an unfair trade barrier—just as the U.S. currently criticizes Europe’s regulation of tech giants.
The popularity of stablecoins highlights a real market demand for better payment systems: faster, cheaper, available 24/7, and programmable. But such systems should be built and provided directly by the public sector. Brazil and China already have efficient digital payment infrastructures; the eurozone is advancing research on central bank digital currencies (CBDCs). Payment systems are public goods and should not be dominated by private speculative capital.
Of course, private enterprises are often sources of innovation. Therefore, public payment infrastructure should remain open, offering programming interfaces that allow entrepreneurs to build applications on top. If done right, such a system could combine public trust with private innovation.
Stablecoins may capture attention as the latest financial fad, enriching a few while potentially destabilizing the financial system. A more sensible approach is to treat payment systems as shared utilities—not playgrounds for speculators.
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