The False Promise of Stablecoins: The Next Time Bomb for the US Financial Crisis

By Rana Foroohar

Last week, I read with a heavy heart that JPMorgan Chase was considering lending against clients’ cryptocurrency holdings, even though we all knew the day would come when cryptocurrencies would enter the real economy.

Bitcoin, one of the digital assets banks might use as collateral, has been nearly four times more volatile than the major indices since the beginning of 2020. It’s also been linked to terrorist financing, and I haven’t read anything that makes me think it’s anything more than a tool for speculators and criminals. But when it's backed by the biggest political donors, it hardly matters. Over the past few years, cryptocurrency political action committees have spent tens of millions of dollars, donating not only to Republican politicians but also to many Democrats. This effort culminated a few 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 lead to the next financial crisis but also further fuel populism and political instability in the United States.

All this is reminiscent of 2000, when over-the-counter derivatives advocates flocked to Washington, D.C., pleading for proper “regulation” so they could bring financial “innovation” to the world. Instead, the credit default swap market grew sevenfold, underregulated, ultimately leading to the 2008 financial crisis.

Now consider that U.S. Treasury Secretary Scott Besant predicts the stablecoin market will grow tenfold in the coming years, from a nearly $200 billion industry to a $2 trillion market, infiltrating everything from loan underwriting to the Treasury bond market.

As Elizabeth Warren, the ranking Democrat on the Senate Banking Committee, told me last week: “We’ve seen this movie before,” with lobbyists “saying ‘please regulate us’ because they want the government’s golden stamp of validation that they are a ‘safe’ investment,” while politicians build bipartisan support for deregulation. In fact, you can clearly trace the path back to derivatives deregulation in 2000, and broader deregulation during the Clinton era that weakened barriers to trading and lending, to the 2018 weakening of Dodd-Frank regulations for regional banks (which precipitated the 2023 banking crisis), and now the Genius Act, but its supporters — including influential Democratic senators like Mark Warner of Virginia and Kirsten Gillibrand of New York — were enough to get it passed. This gives me four reasons to be concerned. First, the Genius Act (like the Commodity Futures Modernization Act of 2000) is being promoted as a way to make cryptocurrencies safer, with stablecoins backed one-to-one by the U.S. dollar. But this won't make an overall volatile asset class less volatile. In fact, it may just make the overall market more volatile. Advocates talk about cryptocurrencies like Bitcoin as a hedge against traditional markets, but the reality is that 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 500 are magnified. Any beta value above one indicates higher volatility than the market. A recent Fidelity report found that Bitcoin's three-year rolling beta is 2.6. Secondly, I believe the timing for encouraging financial "innovation" couldn't be worse, given such uncertainty in markets, the economy, and monetary policy. Imagine if, in the coming months or years, the Federal Reserve were forced to raise interest rates sharply due to inflation, the market would plummet, as it always does when interest rates rise. Cryptocurrencies would fall even deeper and faster. Financial institutions holding cryptocurrencies (including many shadow banks) could run into trouble, causing credit markets to freeze up. Suddenly, we're seeing echoes of 2008. This brings me to my third concern. Supporters of the Genius Act claim it will prop up the dollar and Treasury markets. But it’s easy to imagine cryptocurrency firms like Tether (which holds more Treasuries than Germany) forced to sell off Treasuries in a down market to cover redemption losses, seeking safety. Then you’d see fire sales of Treasuries, higher borrowing costs, and another disastrous scenario where ordinary people would be pressured to bail out speculators.

But this time, it follows a period of growing skepticism about politics that began more than two decades ago. This also 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. This, in turn, paved the way for Trump's rise.

By endorsing (and, of course, trading) cryptocurrencies, Trump is now sowing the seeds for our next financial crisis. What happens when we are in financial chaos, voters are growing increasingly skeptical of mainstream politics, and governments have less and less appetite and ability to cushion the economic downturn? No cryptocurrencies, and no stability whatsoever.