Francisco Goya’s etching The Sleep of Reason Produces Monsters was an artist’s stern warning of the hideous forces unleashed in the mind when reason lowers its guard. Today, stablecoins are the gruesome forces being released into the global economy as President Trump’s crypto dreams, unchecked by reason, morphed into the GENIUS Act.
Stablecoins are the bastard child of parents seemingly at permanent odds with each other: The libertarian spirit of the crypto community and statist dollar-worshipping. Built on the blockchain technology that was meant to tear asunder the oppressive powers of the financial oligarchy (Wall Street and the Fed), stablecoins are nevertheless fastened to that same oligarchy’s greatest totem: the US dollar. The result is a purportedly apolitical money promising to be joined at the hip with the most politically dominant form of money.
What’s a stablecoin?
The idea was produce a cryptocurrency devoid of Bitcoin’s hideous volatility while preserving the freedom to transact anonymously and globally – unseen by any government, in a currency beyond the manipulative reach of corrupt politicians, nosy bureaucrats, greedy bankers, the IRS, the CIA etc.
Technically, stablecoins comprise a distributed ledger containing information on every transaction (the blockchain) plus a mechanism which holds the exchange rate of each token transacted constant at $1. To render this 1:1 exchange rate credible, issuers of stablecoins like Tether and Circle promise that, for every token they sell, they shall keep in reserve the equivalent of an actual $1. Typically, issuers use the dollars they receive when they sell their tokens to buy US Treasury bills of the same dollar face value. As Treasuries pay interest, unlike cash or stablecoins that do not, issuers profit handsomely.
Setting aside their utility for mafia types, who naturally crave any payment means (including $100 and €500 bills) that can lubricate their trade, stablecoins have been a godsent for people in countries, especially in Africa, with fragile monetary systems, hyperinflation, debilitating capital controls etc. Besides providing the unbanked ready access to a proxy for the American dollar, stablecoins offer a means of wiring money abroad that is faster, cheaper, immune to US sanctions and more reliable compared to rickety inter-bank messaging systems (e.g., SWIFT).
In short, while stablecoins were ignored by government, they did considerable good and could not do much harm. However, now that the Trump administration is weaponising stablecoins for its own purposes, their potential for serious damage has risen exponentially. The combination of two executive orders President Trump issued (one on 23rd January and another on 6th March 2025) and the GENIUS Act that the Senate has just approved is turning stablecoins into a massive timebomb deep in the foundations of the global economy.
How widespread are stablecoins and why are they taking off under Trump?
Today, the dollar value of circulating stablecoins is around $250bn. For that sum to be backed with sufficient reserves, it is estimated that, only during 2024, their issuers purchased $40bn of US Treasury bills, making them larger than any foreign buyer of Treasuries during 2024. In the same year, Tether alone reported annual pre-tax profits of $13bn — not bad for an offshore company employing around a hundred people!
As for the number of wallets containing stablecoins, last May it jumped, on a year-to year monthly basis, from 27mn to 46mn while transactions in stablecoins climbed 84 per cent, from to $752bn to $409bn. Already, stablecoins account for around 80% of all crypto transactions.
Such growth could not but encourage the very financial establishment that crypto was originally meant to disrupt to jump aboard. Behemoths like Visa and Stripe are on the bandwagon, with Big Tech in the process of joining too, seeking revenge for the manner in which Wall Street elbowed it out of payment systems – recall the infanticide of Mark Zuckerberg’s Libra. Even Uber, eager to keep more of the cloud rents currently seeping from its ride-hailing platform to the financiers, is developing a fully-owned cross-border stablecoin.
Well before the Trump administration had stepped into the fray to boost them with the GENIUS Act, Standard Chartered was estimating that stablecoins in circulation would increase eight-fold, topping $2tn by 2028. The question then is why are Donald Trump, JD Vance and their MAGA brethren hellbent to boost stablecoins further?
Besides the obvious self-enrichment motive, the more interesting explanation is that stablecoins fit in nicely with the Trump administration’s goal of shrinking global trade imbalances in a manner consistent with their strategy for ‘Making America Great Again’. Nothing motivates these people more than the idea that what is good for their bank account is good for America.
Team Trump has made no qualms that it aims to devalue the dollar, with a view to shrink America’s trade deficit, yet preserve its dominance by using the threat of tariffs to force allies to dump dollars but refrain from buying rival fiat currencies. Stablecoins are assigned a key role in this plan.
Suppose, for instance, Japan were to be bullied into using a considerable portion of its $1.2 trillion holdings to buy dollar-denominated stablecoins. Trump’s twin aims would be served: First, the dollar’s aggregate supply would rise, devaluing the dollar. Secondly, the stablecoin issuers would use the dollars it receives to buy Treasury bills, thus reducing the US government’s borrowing costs and, in the process, bolster dollar supremacy. In the words of JD Vance, a greater stablecoin uptake will be “a force multiplier of our economic might.”
The five supersized systemic risks posed by stablecoins
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Moral Hazard: Stablecoin issuers stand to profit from issuing more tokens than the dollars they collect or from purchasing relatively illiquid (but higher interest rate yielding) securities. In short, the danger of a stablecoin run (the equivalent of a bank run) is clear and present. When stablecoins were small fry (e.g., when in 2021 New York regulators fined Tether $21mn for undisclosed irregularities regarding its reserves), the threat of dodgy reserves was too small to lose much sleep over. However, as stablecoins exceed the $2tn mark, the risks become systemic, perhaps greater than those posed by subprime mortgages in 2007.
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Migrating deposits: As dollars migrate from US domestic bank accounts to stablecoins, demand for Treasury bills rises and their yields fall. Banks must raise their interest rates to stem this outflow while Treasury must issue more Treasury bills to satiate the greater demand for them. A wedge suddenly appears between different types of interest rates: Bank and long-term Treasuries’ rates rise while short-term Treasury bill rates fall causing the so-called yield curve to become steeper – a sure sign of financial instability.
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The Doom Loop between Stablecoins and Banks: In 2023, Circle – the issuer of USDC, the second largest stablecoin – had entrusted $3.3bn of its reserves to the Silicon Valley Bank (SVB). When the latter tanked, a run on USDC began severing its dollar peg. Had the Fed not stepped in to bailout SVB, Circle would be toast. That little incident now seems like a walk in the park given the US Treasury’s prediction that, in the new climate shaped by the Trump administration’s crypto peans, and the GENIUS Act, $6.6tn of US bank deposits are in the process of migrating into stablecoins.
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The Doom Loop between Stablecoins and Securities: Wall Street is keen to use blockchain-based technologies for speeding up, securing and reducing the cost of trading securities – to disrupt the traditional rickety system of trading securities in the same way that stablecoins are disrupting SWIFT. But, to shift the trading of shares, bonds, derivatives and assorted exotic financial contracts onto a blockchain, the contracts and the tokens used to buy or sell them must be inserted into the same blockchain – exactly as most trading in NFTs is done on the Ethereum platform using its own cryptocurrency. This means that an arms race is now on to determine which dollar-backed stablecoin dominates the securities’ trades. Once the answer is in, its usage is bound to go through the roof. But the moment the private company that issues this stablecoin gets into hot waters, the entire stock market along with the $29tn Treasuries market is in peril.
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Global fragility: What happens if a stablecoin issued outside the United States crashes? Non-US institutions, including European ones, lack access to Fed rescue mechanisms. Will the Trump administration offer them the Fed swap lines that kept European banks alive in 2008? It is doubtful. Thus, dollar-backed stablecoins issued in Europe, Asia, Africa or Latin America risk exporting financial fragility globally. Even the European Central Bank is panicking at the prospect of having to find dollars to bailout European holders of dollar-denominated stablecoins.
In the meantime, developing countries face a trilemma: ban stablecoins (forfeiting its substantial benefits), create sovereign alternatives, or accepting deeper dollarisation. China, armed with its digital yuan, sensibly opted to ban stablecoins outright, shielding its financial system. Yet its $4.5 trillion in dollar reserves poses a dilemma—dumping them aids Trump’s dollar devaluation, while holding them risks exposure to US-driven volatility. The BRICS’ preparedness, nevertheless, contrasts with most economies, trapped between dollar dependence and destabilising crypto experiments.
The spectacular inadequacy of the Genius Act
The GENIUS Act, which last Tuesday was approved by the US Senate with a 68-30 majority, is hard to fault if the intention was to maximise the threat of a financial meltdown. Essentially, it weaponises stablecoins as a means of privatising money and effectively outsourcing dollar dominance to Trump-friendly techlords.
Proving their endless inanity, lured by two promises, many Democrats supported this legislation. The first promise was that the Act will protect their chums in Wall Street with a preposterous ban on stablecoins that pay interest. The second promise was that the Act will regulate Trump’s new digital Wild West. How? Issuers of stablecoins worth less than $50bn are to be regulated by the… states, allowing for a thousand lesser stablecoins to bloom across America. As for the systemically significant ones, including issuers domiciled outside the United States (like El Salvador-based Tether), they will be required to submit to an ‘independent’ audit of the quality of their dollar reserve assets.
Two are the ways in which the GENIUS Act paves the ground to a massive crash. One is the ill-defined regulation of their reserves, combined with the inexcusable neglect of the abovementioned doom loops that stablecoin growth is occasioning. But there is a much, much worse aspect of the Act: It emasculates the Federal Reserve. It does this in two distinct ways: First, by banning it from issuing its own stablecoin, a digital dollar by which to counter the up-and-running digital yuan of the People’s Bank of China. Secondly, by implicitly burdening the Fed, without giving it the necessary tools (e.g. the equivalent for stablecoins of the Federal Deposit Insurance Corporation), with the enormous task of cleaning up the mess private stablecoin issuers are bound to create.
Conclusion
To err in the world of financial innovation is human. But to cock things up big time all you need is the US government to promote private stablecoins, to cloak them in the legitimacy that a little regulation-lite can provide, to ban the Fed from deploying the same technology, and to deprive it of the means to clean up the inevitable mess.
So, yes, be afraid. Be very afraid.
For the UNHERD site, where this article was first published, click here.
