The US Senate gave the green light to the GENIUS Act on June 17th, a move hailed by many in the digital currency space. This legislation primarily focuses on creating a regulatory framework for “stablecoins,” a particular type of cryptocurrency. However, a deeper examination suggests that this act could potentially pave the way for another major economic downturn on a global scale.
To fully grasp the implications of the GENIUS Act, it’s helpful to consider the initial concept behind cryptocurrencies. They emerged as decentralized forms of currency, intended to have their supply – and, consequently, their value – dictated not by central banks or government entities, but by a sophisticated, globally distributed network of computers.
Bitcoin, the most prominent early cryptocurrency, was envisioned as a digital equivalent of gold. The process of obtaining new Bitcoins, known as mining, was designed to provide a relatively steady stream of new currency, echoing the gold standard system where a currency’s value was directly tied to the value of gold reserves rather than the fluctuating health of national economies.
Currently, however, a fitting analogy for cryptocurrency is a high-stakes game of chance. People are often drawn to crypto investments precisely because of its inherent instability and potential for rapid value changes, qualities unlike the dependable nature of gold. Given that the factors influencing crypto prices can be obscure and difficult to predict, investing in crypto carries a significant element of risk. The likelihood of turning a profit through crypto trading can often resemble the odds of winning at a roulette table.
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Enhancing Crypto’s Reputation
The cryptocurrency industry recognized that this high level of volatility, along with inherent unpredictability, could deter more conservative investors. To project an image of greater stability, companies began developing “stablecoins”: cryptocurrencies designed to maintain a fixed value relative to a more traditional currency, such as the US dollar.
Consider a hypothetical scenario: a company named “T” introduces its own cryptocurrency called “t-coin,” which is designed to be worth exactly one US dollar (1:1). If you purchase a t-coin, you expect to be able to redeem it from company T for one USD. If company T cannot fulfill this obligation, both the currency and the company itself are likely to fail, resulting in financial losses for t-coin holders.
Unfortunately, this type of collapse is not merely a theoretical concern. In 2022, the USD-pegged stablecoin Terra experienced a dramatic plunge in value in South Korea. This triggered a devastating market crash that wiped out approximately half a trillion USD from the global crypto market practically overnight.
Cryptocurrencies with Assured Value?
On a past trip to Las Vegas, I exchanged US dollars for casino chips upon entry. These chips served as currency within the casino walls. Before departing, I could convert any remaining chips back into dollars at the original exchange rate. A stablecoin functions similarly, but instead of physical casino chips, the transactions involve electronic tokens.
Following the Senate’s approval of the GENIUS Act, major corporations like Amazon and Walmart are reportedly considering issuing their own stablecoins for customer use. This raises significant questions about the implications of individual businesses operating their own currencies. Would Amazon tokens be accepted at Walmart, or vice versa? Would the value of Amazon tokens remain consistent if used for purchases at Walmart? If numerous large US companies introduce their own unique tokens, which token would be the preferred method of payment for different transactions?
The GENIUS Act aims to regulate stablecoins, and the public might assume that this regulation guarantees a uniform level of safety across all stablecoins. However, such a guarantee is impossible, and there remain fundamental questions about how businesses might exploit their own stablecoins to gain a competitive advantage.
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A Potential Global Financial Crisis
During my casino visit, I had no reason to doubt that the establishment would honor its commitment to exchange my chips back into US dollars. Now, imagine taking those chips home, only to discover upon returning the next night that the casino had closed or lacked sufficient funds to redeem my chips.
The world has witnessed similar currency crises where a national government, rather than a private company, issues a currency pegged to another. A classic case is Argentina, where the Central Bank maintained a one-to-one exchange rate between the Argentinian peso and the US dollar from 1991 to 2002. This artificial peg distorted trade relationships with countries that did not use the US dollar. An economic crisis resulted, which intensified when the peg was finally abandoned.
Now, consider this: a major US corporation issues 100 billion USD-pegged stablecoins. Initially, the company thrives and possesses sufficient assets (including US Treasury securities) to guarantee the coin’s value. It continues to issue more stablecoins, but its financial condition eventually deteriorates.
This scenario could trigger a domino effect. Investors might eventually realize that the company has issued a greater quantity of stablecoins than its holdings of US Treasuries can support. They would then begin to redeem their stablecoins, forcing the company to sell off its US Treasury bills in an attempt to reassure nervous investors. This action would likely prove ineffective.
The consequences would quickly spread. A selloff of US bonds would decrease their value, causing US interest rates to surge. A sudden, unexpected, and substantial increase in US interest rates could easily trigger a global financial crisis, as banks and governments worldwide face immediate solvency issues.
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Regulation is Not a Fail-Safe
Of course, such a scenario is not inevitable. The new legislation will subject companies issuing stablecoins to regulation, and regulators will be responsible for verifying that they maintain adequate reserves to meet their obligations in the event of a large-scale investor sell-off.
However, US financial regulators are not infallible. Just a few years prior, they failed to recognize that Silicon Valley Bank held an excessive amount of assets vulnerable to rising interest rates, an oversight that precipitated the bank’s collapse in 2023.
Therefore, it is not difficult to envision a situation where several companies irresponsibly issue an excessive number of stablecoins. Should this occur, the repercussions could be devastating, not only for the US but for the entire global economy.