Francisco Goya’s etching The Sleep of Reason Produces Monsters warned 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, morph into reality. With the Genius Act, which the Senate passed on Tuesday, stablecoins are one step closer to becoming central to world finance.
Stablecoins are the bastard child of parents seemingly at permanent odds with each other: the libertarian crypto community and statist dollar worshippers. Built on the blockchain technology that was meant to dismantle the financial oligarchy (Wall Street and the Fed), stablecoins are nevertheless fastened by a 1:1 exchange rate to that same oligarchy’s greatest totem: the US dollar. The result is a purportedly apolitical money joined at the hip with the most politically dominant form of money.
Stablecoins were conceived as the best of both worlds. While devoid of Bitcoin’s hideous volatility, they nonetheless preserved the freedom to transact anonymously and globally — unseen by any government. Setting aside their utility for mafia types, who naturally crave any means of payment that lubricates their trade, stablecoins have been a godsend for people in countries with fragile monetary systems, especially in Africa. Besides providing those without a bank with ready access to a proxy for the American dollar, stablecoins offer a way to wire money abroad that is immune to US sanctions and more reliable than rickety inter-bank messaging systems (e.g. SWIFT).
In short, for as long as governments ignored stablecoins, they did considerable good and could not do much harm. However, now that the Trump administration is weaponising them for its own purposes, their potential for serious damage has risen exponentially. The combination of two executive orders that President Trump issued (one on 23 January 2025 and another on 6 March 2025) and now the Genius Act is turning stablecoins into a massive time bomb deep in the foundations of the global economy.
Today, the dollar value of circulating stablecoins is around $250 billion. For that sum to be backed with sufficient reserves, it is estimated that last year issuers purchased $40 billion of US Treasury bills, more than any foreign buyer of Treasuries during 2024. In the same year, the stablecoin issuer Tether alone reported annual pre-tax profits of $13 billion — not bad for an offshore company employing around 100 people.
“Stablecoins were conceived as the best of both worlds.”
As for the number of crypto wallets with stablecoins, last year there was a jump from 27 million to 46 million while transactions climbed 84%, from $752 billion to $409 billion. Already, stablecoins account for around 80% of all crypto transactions.
Such rapid growth could only encourage the very financial establishment that crypto was originally meant to disrupt. Behemoths like Visa and Stripe are jumping on the bandwagon, and Big Tech is set to follow, seeking revenge for how Wall Street elbowed it out of payment systems. Even Uber, eager to keep more money 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 estimated that stablecoins in circulation would increase eight-fold, topping $2 trillion by 2028. The question then is why are Donald Trump, JD Vance and their MAGA brethren hellbent on boosting 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 to “Make 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 its intentions clear: to devalue the dollar and shrink America’s trade deficit, while preserving its dominance by using the threat of tariffs. Stablecoins have 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. The dollar’s aggregate supply would rise, devaluing the dollar. 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, bolstering dollar supremacy. In the words of JD Vance, a greater stablecoin uptake will be “a force multiplier of our economic might”.
But stablecoins pose systemic risks that Team Trump would be wise to not ignore. 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. When stablecoins were small fry (e.g., when in 2021 New York regulators fined Tether $21 million for undisclosed irregularities regarding its reserves), the threat of dodgy reserves was too small to lose much sleep over. However, as stablecoins exceed the $2 trillion mark, the risks could become greater than those posed by subprime mortgages in 2007.
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 the 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.
In 2023, Circle — the issuer of USDC, the second largest stablecoin — had entrusted $3.3 billion 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 bail out SVB, Circle would have been 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, $6.6 trillion of US bank deposits are in the process of migrating into stablecoins.
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 must be inserted into the same blockchain. 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 water, the entire stock market along with the $29 trillion Treasuries market is in peril.
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 bail out European holders of dollar-denominated stablecoins.
In the meantime, developing countries face a trilemma: ban stablecoins (forfeiting its substantial benefits), create sovereign alternatives, or accept 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.
And so the Genius Act is hard to fault — if the intention is to maximise the threat of a financial meltdown. Essentially, it weaponises stablecoins to privatise money and effectively outsource dollar dominance to Trump-friendly tech lords.
Proving their endless inanity, many Democrats supported this legislation, lured by two promises. First, the Act will protect their chums in Wall Street with a preposterous ban on stablecoins that pay interest. Second, the Act will supposedly regulate Trump’s new digital Wild West. How? Issuers of stablecoins worth less than $50 billion will be subject to state regulation, 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.
The Genius Act paves the way to a massive crash. The authors of the bill have not clearly defined how the reserves will be regulated and they have inexcusably neglected the risk of doom loops. But there is a much, much worse aspect of the Act. It emasculates the Federal Reserve 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. And, deprived of the necessary tools like the equivalent of the Federal Deposit Insurance Corporation, the Fed will be tasked with cleaning up the mess private stablecoin issuers are bound to create.
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. With the Genius Act we are almost there. The time to oppose it, frustrate it, rescind it, is now.
