The danger of stablecoins lies in the ways they are meant to be safe.
On July 18, President Donald Trump signed into law the boastfully named GENIUS Act. If the law wreaks havoc on the financial system, as seems highly likely, that name will become a grim joke: What genius thought that letting the cryptocurrency industry write its own rules would be a good idea?
The Guiding and Establishing National Innovation for U.S. Stablecoins Act purports to create a regulatory framework for a type of cryptocurrency called stablecoins. Despite their reassuring name, stablecoins—which promise a constant value relative to real-world currencies, usually the U.S. dollar—are by far the most dangerous form of cryptocurrency. Their danger lies in the way they are meant to be safe.
Most people understand that cryptocurrencies are volatile and speculative. Bitcoin, ether, and other name-brand cryptocurrencies fluctuate in value day by day, year by year. Stablecoins are meant to do away with these fluctuations, yet they pose what may be a larger threat to the wider financial system. The GENIUS Act, like the Markets in Crypto-Assets regulation adopted by the European Union in 2023, offers safeguards that will likely enlarge the stablecoin market considerably. If—or when—the coins explode, the GENIUS Act more or less ensures that the U.S. government will have to bail out the stablecoin issuers and their holders on a scale of hundreds of billions of dollars.
This time it’s different. In finance, those words are almost always ominous. In the early 2000s, the financial world claimed that by bundling subprime mortgages into bonds, many of them rated triple-A, it had invented a new kind of risk-free asset. But risk always carries a price. Pretending a high-risk asset is low-risk allows manipulators to pocket the benefits of this gamble for themselves. In 2007, when the supposedly triple-A subprime bonds went bust, the world plunged into the worst recession since the 1930s. Stablecoins offer the same alchemy—junk into gold—and, very possibly, the same result.
A $100 purchase of stablecoin today should mean $100 in the future, which ideally makes this cryptocurrency a safe place to store digital funds. Stablecoins are meant to offer all the security and liquidity of a bank deposit within the digital architecture of the cryptocurrency system.
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But such pledges of stability have proved unreliable. In the 11 years they have been around, a number of stablecoin issuers have defaulted, erasing billions of dollars in holdings. Terra, once a top stablecoin issuer, wiped out almost $60 billion of investor assets in May 2022. “Stablecoins, like money-market funds, project security but can collapse under pressure,” the Nobel Prize–winning economist Jean Tirole observed recently.
The GENIUS Act, which is scheduled to take effect by January 2027, offers regulations that are meant to reassure investors by making this cryptocurrency less disaster-prone. The problem is that the new guardrails protect the profits of issuers without sufficiently reducing the risks to buyers and taxpayers. As a result, the GENIUS Act more likely ensures that the next round of stablecoin failures, when it comes, will be bigger and more destructive to the non-crypto economy.
Stablecoin advocates argue that the cryptocurrency offers superior technology for storing and moving funds. Bank transfers are often slow, and international transfers can be expensive and inconvenient. Stablecoins will ostensibly allow coin holders to move large sums of money across borders as easily and as cheaply as someone today can pay a babysitter via Venmo.
That promise is false. For lawful transactions, cryptocurrencies are too prone to fraud, hacks, and theft to be a reliable means of exchange. Nearly $3 billion of cryptocurrency was stolen in the first half of 2025 alone, according to a report by blockchain-analysis firm Chainalysis. In 2024, a Texas-based pharmaceutical CEO tried to move some stablecoins to another user, but made a single-digit transcribing error—and misdirected his entire holdings, worth about $1 million. The anonymous receiver did not reply to requests to return the funds. The stablecoin issuer, Circle, disclaims all responsibility. The pharmaceutical company’s lawsuit against Circle is ongoing.
Most cryptocurrency owners don’t use it to buy things or pay people. A 2023 survey by the Federal Deposit Insurance Corporation found that among the small minority of U.S. households that own crypto assets, only 3.3 percent use them to send or receive payments; about 2 percent use them to purchase goods in the real economy.
The real advantage of stablecoins is that they allow asset holders to enter the U.S.-dollar system (99 percent of all stablecoins are U.S. dollar–pegged) while eluding normal U.S.-government rules, such as the “Know your customer” laws that expose bank depositors to intrusive questions about who they are and how they got their money. The GENIUS Act purports to apply such laws to stablecoin issuers, but only when a stablecoin is first issued in the United States. Once a stablecoin has been issued, however, tracking how it is swapped, and to whom, is difficult.
Tether, for example, is contemplating a new coin that would not be sold to American or EU customers, and so would escape “Know your customer” rules entirely. Decentralized exchanges allow users to swap stablecoins without oversight, which makes it easy enough for foreign coins that aren’t subject to anti-money-laundering measures to enter circulation in the U.S. The GENIUS Act requires stablecoin issuers to report suspicious activity. But because most of the stablecoin architecture exists outside of the U.S., that requirement will again be difficult to enforce.
Until now, the inherent dangers of stablecoins have deterred most investors and kept the market relatively modest: about $280 billion to $315 billion, smaller than the 12th-largest bank in the U.S. The entire stablecoin market could go bust tomorrow, and the U.S. financial system would wobble but recover. In light of the GENIUS Act, however, analysts at Citigroup project that the stablecoin market could grow as big as $4 trillion by 2030. A default in a market of that size could create shocks that reverberate through the global financial system.
Stablecoin issuers are functionally deposit-taking institutions. Like banks, they accept cash on a promise to return these funds on demand. Banks, however, are governed by safeguards to protect depositors, notably deposit insurance. Banks are also subject to quarterly inspections and annual audits. The GENIUS Act forgoes inspections and subjects only the largest issuers—with more than $50 billion in holdings—to annual audits. In this way, stablecoins threaten to revive some of the worst practices of early American banking, when depositors entrusted funds to lightly regulated banks at the depositors’ own risk.
The GENIUS Act purports to reduce or eliminate the risk of a stablecoin default by requiring stablecoin issuers that sell to Americans to back deposits “with liquid assets like U.S. dollars or short-term Treasuries” and offer “monthly, public disclosures of the composition of reserves,” according to the Trump administration’s fact sheet.
That sounds solid, right? But storing cash in very short-term assets—with maturities in hours or days—that earn only a few basis points in interest would be a low-rewards business for stablecoin issuers. The crypto firms that lavished millions of dollars on lobbying and campaign donations to push this legislation through Congress—on top of the tens of millions of dollars that crypto companies poured into Trump’s presidential campaign—did not invest that money to earn low returns.
Instead, stablecoin issuers will chase higher rates of return. The GENIUS Act permits them to buy Treasuries with maturities as long as 93 days. Three-month Treasuries typically pay more interest than very short-term Treasury-backed paper—4 percent on an annualized basis as I write. Three-month Treasuries are also subject to interest-rate risk. Whenever interest rates rise, the value of bond holdings falls. When the yield on three-month Treasuries more than doubled from June 1 to September 1, 2022, anyone who bought a three-month Treasury in June and had to sell it before maturity would have suffered a loss in the value of their capital.
Now imagine yourself as a stablecoin owner during that period. Perhaps the issuer has backed your coins with three-month Treasuries that are losing value every day. From January 1, 2022, to mid-summer 2023, for example, the yield on three-month Treasuries rose from less than 0.1 percent to about 5.4 percent. If holders decide to cash their stablecoins, the issuer may need to liquidate some assets. There should be enough money for the first coin holder to demand repayment, as well as the second, maybe the third. But the issuer’s funds will eventually run out. As anxiety about liquidity spreads, coin holders will suddenly be racing one another to withdraw their funds before the stablecoin issuer fails—the modern equivalent of a bank run, but executed at digital speed.
When a traditional bank’s holdings decline in value, depositors do not worry much. Their deposits are backed by federal insurance, for which the bank pays a hefty and risk-adjusted fee. If a bank takes more risks with its holdings, it typically pays more for insurance. The bank may fail, but the depositors’ money is safe. No need to run.
Stablecoin issuers do not pay for deposit insurance. They are backed exclusively by the assets they hold—assets that rise and fall in value every day, every minute—and face no real-time penalty for chasing higher returns. This ensures that the first warning of trouble will also likely come too late to avoid catastrophe.
Proponents of the GENIUS Act argue that the law accounts for these risks by mandating diversified assets. Stablecoin issuers aren’t allowed to commit everything to three-month Treasury notes. They’ll need some cash, some overnight assets, some 30-day assets, and so on. They’ll balance, spread, and hedge. If they do not hedge properly, investors will receive notice because of the GENIUS Act’s new disclosure requirements.
The problem with these disclosures, though, is not only that they put the onus of vigilance on consumers, but also that these reports will lag far behind the needs of a financial system that sees billions of dollars move in fractions of a second. An issuer that looks sound in a monthly-disclosure document may not be solvent a week later.
This mix of imperfect information, lax regulation, and a lack of insurance is the formula for inspiring the kind of anxiety and uncertainty that spur bank runs. If the GENIUS Act ultimately persuades investors around the world to hold more of their U.S.-dollar assets in stablecoin, any whisper of bad news can trigger a crisis. Such crises pose a threat to the larger U.S. financial system because the stablecoin issuers in need of quick cash will have to sell their Treasury holdings. If the GENIUS Act succeeds in growing these holdings, their sudden liquidation will lower Treasury values for everyone. Interest rates will rise for everyone.
Tether, based in El Salvador, recently announced that its U.S. Treasury holdings have reached $135 billion, making the company the 17th-largest holder of American debt globally, just behind Germany. Tether has faced a bank run once before. In May 2022, when the company’s assets amounted to about $80 billion, Tether saw demands for $10 billion in redemptions over two weeks. The panic was triggered by doubts that Tether was not in fact matching its obligations with safe and liquid holdings. It was also investing in digital assets and corporate bonds, which carry a higher risk for often-higher returns. Had the company tanked, the U.S. government could have shrugged off its failure. But as Tether’s deposits and assets continue to grow, a failure to repay U.S.-dollar deposits will be harder to ignore.
Although the GENIUS Act bars issuers from holding some of the assets and bonds that got Tether into trouble, it doesn’t resolve the problem. The appeal of stablecoins is that they are liquid and stable, yet issuers make money only if they back these coins with assets that pay a return—but which fluctuate in value. In September, Tether’s CEO, Paolo Ardoino, announced that the company was evaluating a fundraising round that could value Tether at about $500 billion.
The regulatory sweet spot for a financial institution is to escape paying for insurance while gambling on an implicit “too big to fail” guarantee if anything goes wrong. That’s what happened with money-market funds in 2008–’09. These funds were theoretically unguaranteed, but when they all teetered on the edge of failure, the federal government stepped in. In the end, the federal government guaranteed $2.7 trillion of money-market liabilities—for funds that had not paid a cent for this federal protection. That’s the likely future for stablecoins as well.
The financial world has been debating the risks and rewards of cryptocurrency for years. Advocates hail it as the money of the future. Skeptics dismiss it as a racket that best serves criminals. (Warren Buffett famously called bitcoin “probably rat poison squared.”)
For most people, these arguments have felt remote. Cryptocurrencies do not yet intersect in a meaningful way with the rest of the economy. If you don’t play the game, you won’t get hurt. When the big crypto exchange FTX went bankrupt in late 2022, felled by its embezzling founder, Sam Bankman-Fried, its collapse helped plunge the entire crypto universe into a slump. The prices of bitcoin and ether dropped by more than 60 percent. Yet this “crypto winter” hardly mattered to anyone outside the crypto world. The U.S. economy posted strong growth before, during, and after the FTX failure.
Stablecoins, however, are engineered to intersect with the real-world financial system. A goal of the GENIUS Act, in promoting stablecoins, is to create a new market for U.S. debt. As the White House fact sheet about the act states: “The GENIUS Act will generate increased demand for U.S. debt and cement the dollar’s status as the global reserve currency.” This would seem to be a good thing, given that the U.S. government’s debt recently surpassed $38 trillion and is growing fast. More demand for U.S. Treasury paper will, it’s again hoped, boost prices for U.S. debt obligations and thus lower the interest rate paid by the U.S. Treasury and U.S. taxpayers.
But where will this demand come from? One possibility is bad actors. Because stablecoins use the secretive architecture of the crypto universe, they appeal to those who want to hold U.S. dollar assets—as noted above, 99 percent of all stablecoins are U.S. dollar-denominated—without the scrutiny of the American banking system. Estimates of the global pool of dirty or covert assets are about $36 trillion, or 10 percent of total global wealth—an ocean of money in search of a passage to legitimacy. There is something perverse about a plan to boost demand for Treasury debt by making it easier for crooks to circumvent U.S. laws against terrorist financing and money laundering.
In 2023, the Cayman Islands–based crypto exchange Binance paid more than $4 billion to the U.S. Treasury after the Justice Department found that the exchange had allowed “suspicious transactions with terrorists,” including Palestinian Islamic Jihad, al-Qaeda, the Islamic State of Iraq and al-Sham (ISIS), and Hamas’s Al-Qassam Brigades. In October 2025, President Trump pardoned the founder of Binance amid reports that Binance would soon go into business with the Trump family’s crypto venture.
How did the GENIUS Act pass Congress? The vote was not close: 68–30 in the Senate, and 308–122 in the House.
Veterans of the battle credit the ruthlessness and vigor of those who stand to benefit—and the apathy and lassitude of those who will likely be harmed. Stablecoins pose a real threat to the traditional banking industry by offering investors a place to park funds with no questions asked. Yet American banks convinced themselves they had nothing to fear. The GENIUS Act forbids stablecoin issuers from paying interest on the deposits they accept, which theoretically protects banks from direct competition. Unfortunately for banks, the stablecoin industry is rapidly inventing ingenious ways to bypass this prohibition.
Conventional banks may see an opportunity for themselves, too. Bank of America, Deutsche Bank, UBS, and Goldman Sachs are exploring issuing a joint stablecoin of their own, deploying their prestigious names to reassure uninsured depositors. It bears noting that their prestige did not save them from all the bad loans that precipitated the Great Recession—but it smoothed their way to a bailout by the U.S. government.
Proponents of the GENIUS Act were also served by the general atmosphere of magical thinking that surrounds crypto currencies. This has been a boom year for crypto investors, and the industry’s clout in Congress has been enhanced by this euphoria. The well-outnumbered congressional opponents of the GENIUS Act, notably Senator Elizabeth Warren, expressed more concern about the crypto-related profiteering of President Trump and his family than about the larger harm stablecoins may bring.
Senator Warren was certainly right that the crypto industry has rapidly and massively enriched President Trump and his family. The Financial Times reported recently that crypto operators have placed more than $1 billion in pre-tax profits in the pockets of the president and his family in the past year. These payments have yielded some perks: In April, the Justice Department announced it would cease most investigations of cryptocurrency fraud and disband the investigating team. The Trump-family crypto venture, World Liberty Financial, has also debuted its own stablecoin, USD1, ensuring that the president stands to gain if stablecoins are more widely adopted.
This corruption may be repulsive, but it’s not system-threatening. The system-threatening problem with stablecoins is that issuers wish to greatly expand their inflow of deposits without an adequate guarantee that they will be able to repay those deposits in a crisis.
Read: Trump’s crypto dealings now have the perfect cover
As the cryptocurrency market gets bigger, the shocks are getting worse. On October 10, 2025, the industry suffered its biggest one-day evaporation of value on record. The shock was triggered by President Trump’s latest tariff threats against China. Two anonymous accounts dumped enormous quantities of cryptocurrency some minutes before the threats were made public, sparking speculation about insider trading and forcing some crypto exchanges to suspend deposits. The crypto industry remains disconnected enough from the rest of the financial system that this crash inflicted little harm on the wider economy. That happy separation looks likely to end soon.
History suggests that the U.S. government won’t be able to ignore a big stablecoin default, but the GENIUS Act denies the U.S. government the tools necessary to prevent one.
Given that the GENIUS Act doesn’t take effect until 2027, there’s time to contain the damage. This would mean treating stablecoin issuers as deposit takers, and requiring all U.S.-dollar stablecoin issuers that do business in the U.S. to pay insurance on their deposits. Stablecoin issuers should also be required to supplement their monthly disclosures with the same event-based disclosures required of banks. Stablecoin issuers that wish to do business in the United States should be domiciled and pay taxes here, as banks must, not in El Salvador or the Cayman Islands.
Lawmakers should also address the regulatory and anticompetitive practices that make international money transfers so costly. So long as Western Union charges $19.90 to send $200 to Mexico, the argument that cryptocurrency is a better way to move money holds resonance, if not truth. Improving non-crypto money transfers would deprive the otherwise harmful and useless cryptocurrency industry of one of the few specious justifications for its existence.
After the 2008 subprime disaster, someone asked the investor Jeremy Grantham, What have we learned from this crisis? Grantham answered: “In the short term a lot, in the medium term a little, in the long term, nothing at all.” Stablecoins, which bristle with all the dangers of subprime-mortgage securities, remind us how much time has passed since that last crisis. We have forgotten what an unreasonable risk looks like.
In a free country, the government will not get too deeply in the way of speculation. You want to go long on tulip futures with your own money? Nobody should stop you. Danger flares only when speculators speculate with other people’s money. That’s what stablecoin issuers seek to do—and what the GENIUS Act encourages. The Trump administration and a pliant Congress have lit a fuse to America’s next financial catastrophe. Unless that fuse is snipped, the explosion will be only a matter of time.
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