The New York Times: Cryptocurrency is launching a financial "coup"

Author: Dan Davies; Henry J. Farrell; Source: The New York Times; Compiler: BitpushNews Yanan

It was a fruitful week for US cryptocurrency interest groups. The Genius Act was passed by the Senate, officially legalizing cryptocurrencies such as "stablecoins". More notably, President Trump hosted a private dinner on Thursday for the top 220 investors in the number of $Trump memecoins. However, for the United States as a whole, this was by no means a week worth celebrating.

A so-called stablecoin is a crypto asset backed by traditional assets such as the US dollar. The USD1 stablecoin issued by the Trump family through its cryptocurrency company World Liberty Financial is a typical example. If this type of digital currency is used to transfer political interests, its harm cannot be underestimated. But what is more worthy of vigilance is the deep impact they may have on the mainstream financial system of the United States - this risk is more hidden and more destructive.

Stablecoin supporters claim that such currencies will consolidate the financial hegemony of the United States - Trump even bluntly stated that stablecoins will "further expand the global dominance of the US dollar."

However, the reality may be just the opposite. Such digital currencies may not only weaken the international status of the US dollar, but may also encourage financial fraud, circumvention of sanctions and other behaviors, and even trigger systemic risks. What is more worthy of vigilance is that they may open the door for another currency to replace the US dollar as a global trade settlement tool.

World Liberty Financial said its stablecoin will be backed by short-term U.S. Treasury bonds, U.S. dollar deposits and other cash equivalents. Similar to the role of the U.S. dollar as the cornerstone of the global financial system, stablecoins attempt to provide a value anchor standard for the cryptocurrency market - avoiding the cost of exchanging real dollars in regulated bank accounts and bypassing many restrictions of the traditional financial system.

Cryptocurrency interest groups are trying to break the boundaries between the crypto market and traditional finance by incorporating stablecoins into the mainstream U.S. financial system. This strategy allows them to switch freely between two very different areas: on one side is the highly volatile cryptocurrency casino (people can speculate on various hot network coins at will) and on the other side is the strictly regulated traditional financial market (assets and bank accounts are protected by the U.S. Securities and Exchange Commission and the Federal Deposit Insurance Corporation).

With Trump's return to the White House, the cryptocurrency industry has ushered in a new opportunity for development - but this is not Trump's credit alone. Cryptocurrencies have gained bipartisan support thanks to huge amounts of money from political action committees (PACs) and a series of defeats by politicians who are skeptical of cryptocurrencies. (In 2024, the cryptocurrency industry spent $40 million to successfully block the re-election of Ohio Senator Sherrod Brown, a well-known cryptocurrency critic.) Supporters of stablecoins believe that the boom in cryptocurrencies will consolidate the international status of the US dollar. As one of the co-sponsors of the Genius Act, New York Democratic Senator Kirsten Gillibrand warned that the United States is at risk of "falling behind in the digital currency race." She specifically pointed out: "We are watching Europe and China make moves in the digital currency field, and the Trump administration is obstructing the Federal Reserve's plan to launch a digital dollar, which will undoubtedly make us fall further behind." Gillibrand argued that since most stablecoins are anchored to the US dollar, strengthening the global dominance of the US dollar by strengthening supervision and promoting such digital currencies can actually strengthen the global dominance of the US dollar. This view is not entirely without reason - the reason why the US dollar can dominate the world is precisely due to the stability of the US economy and politics and the international payment network it has established. This dominant position allows the United States to transform its core position in the global financial system into a strategic weapon: through economic sanctions, the United States can force international financial institutions to choose between "serving customers who are not welcome in the United States" and "entering the global financial system dominated by the US dollar."

The cryptocurrency industry firmly believes that the legalization of stablecoins will formally incorporate the current mixed crypto ecosystem - it should be pointed out that the main force in this system, that is, many crypto projects and exchanges, were originally created to circumvent or even replace the hegemony of the US dollar and government legal tender - into the mainstream financial system.

All this is undoubtedly a major benefit to the cryptocurrency industry, but it has buried a huge hidden danger to global financial stability. Just look at the bold words of crypto enthusiasts: David Sacks, the "artificial intelligence and cryptocurrency czar" appointed by Trump, once publicly expected that cryptocurrencies such as Bitcoin would become the "new world currency" and that the US financial hegemony would be replaced by disorderly competition in the private sector.

If cryptocurrencies become mainstream financial instruments, the chaos that may be caused is worrying. Democratic staff on the Senate Banking Committee pointed out that the "Genius Act" would allow US exchanges to list stablecoins issued by offshore companies that are not subject to local supervision. Critics specifically mentioned that Tether, the main stablecoin currently in circulation (whose operating entity is outside the jurisdiction of the United States), has been proven to be a channel for funds for criminals and sanctions evaders. More alarmingly, some "mixer service" platforms with transaction concealment functions have been accused of assisting North Korean hackers in laundering hundreds of millions of dollars.

Even if there is a sound regulatory framework, enforcement is the key. The recent policy of the US Department of Justice is puzzling - on the one hand, it admits that terrorist organizations such as Hamas and ISIS use cryptocurrency platforms to conceal capital flows and evade investigation, while on the other hand, it announces that some platforms are exempt from prosecution. The notorious meme coin scam (issuers collect public funds and then run away) is unlikely to be held legally responsible when the current president regards it as a tool for personal profit.

The most fundamental concern about stablecoins may be the systemic financial risks they may cause. This special existence on the edge of the traditional financial system has brought unprecedented regulatory difficulties. Although the framers of the "Genius Act" proposed to regularly evaluate the impact of stablecoins on financial stability, they deliberately avoided a core question: Will the US government provide credit endorsement for the US dollar stablecoin?

The key to this question is: when a stablecoin faces collapse or is proven to be fraudulent, should the government rescue it? If it chooses to rescue, it may leave taxpayers with heavy debts - this is the fundamental reason why traditional financial institutions that are "too big to fail" need to be strictly regulated.

But if the rescue is refused, it will bring new systemic risks to the international dollar system. When the market cannot predict which institutions will fall due to the chain reaction and how much risk exposure there is, a bank run crisis may break out, eventually leading to the entire financial system being depleted of liquidity. This is also the fundamental reason why regulators require major participants in the global dollar market to maintain a high degree of transparency.

Take Tether as an example. Its CEO once bluntly revealed a warning scenario: because large banks refused to cooperate, European stablecoin issuers had to deposit funds in small and medium-sized banks. But if the market loses confidence in the stablecoins held by these banks and there is a concentrated redemption of 20% of the positions, these small and medium-sized banks will immediately face a crisis similar to a traditional bank run.

Who can prevent this panic from spreading to the entire banking system? This role must be assumed by institutions with sufficient rescue capabilities-and real US dollars must be used, not those specious cryptocurrencies.

This explains why the question of "should the United States support dollar stablecoins" is so difficult to answer. It is no wonder that reports show that many countries are trying to reduce the dependence of their banks on dollar financing.

The international community sees the US's move to legalize stablecoins as a potential threat. Once stablecoins become a new financial instrument controlled by the United States, Washington may use them to further infiltrate the financial systems of other countries. More worryingly, the new binding relationship between the US dollar and cryptocurrencies may allow illegal capital flows to reach an unprecedented scale.

European Central Bank Chief Economist Philip Lane warned that reliance on stablecoins will lead to a shift in financial activities from the euro system to private cryptocurrencies backed by the US dollar, which will make Europe more vulnerable to US economic pressure.

As an important part of the EU's "strategic autonomy" plan (aimed at reducing dependence on the United States), the European Central Bank is accelerating the construction of the digital euro. This public-sector-led digital currency will not only provide a complete alternative payment network, but will also have built-in privacy protection and security mechanisms - in stark contrast to private stablecoins.

The current situation shows that stablecoins have not only failed to consolidate the dollar's hegemony by "helping the United States catch up with other countries" as expected, but are instead prompting countries to accelerate their escape from the constraints of the dollar system. Europe is not only building its own financial protection network, but also planning to establish a new global alternative - this increasingly untrusted US-led system is facing unprecedented challenges.

The head of the European Central Bank's digital euro project has begun to explore its "international application prospects", aiming to create a new payment system that "respects the sovereignty of various countries, reduces systemic risks, and creates new development opportunities."

Ironically, stablecoins were originally expected to use the credit of the US dollar to regulate the chaotic crypto market, but now they may in turn transmit the chaos of cryptocurrencies - coupled with the special policy orientation of the Trump administration - to the traditional financial system dominated by the US dollar. This reverse penetration is causing deeper systemic risks.