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Yves here. In our discussion about the high probability of an AI stock bubble burst, we had indicated that distress in debt or currency could trigger a market collapse, reminiscent of the events of 1987. However, we overlooked the potential crises that could arise from runs on stablecoins and the depreciation of stablecoin derivatives. This article seeks to address that omission.
By Arthur E. Wilmarth, Professor Emeritus of Law, George Washington University. Originally published at the Institute of New Economic Thinking website
The GENIUS Act represents a harmful law that introduces serious risks to our financial and economic landscape. To mitigate these threats, Congress must (1) repeal the GENIUS Act and implement legislation mandating that all stablecoin providers be FDIC-insured banks, and (2) adopt regulations requiring compliance for all crypto derivatives with the existing non-digital derivative rules laid out in Title VII of the Dodd-Frank Act.
On July 18, 2025, President Trump signed into law the “Guiding and Establishing National Innovation for U.S. Stablecoins Act” (GENIUS Act). Despite its lofty name, the GENIUS Act is a misguided regulation that poses significant threats to our financial stability, economy, and society. It permits nonbank entities to issue uninsured stablecoins to the public, eliminating critical protections associated with federal deposit insurance and the stringent regulations that apply to FDIC-insured banks. Additionally, the GENIUS Act empowers federal and state regulators to grant extensive authority to nonbank stablecoin issuers to offer highly leveraged crypto derivatives and other speculative crypto investments.
As detailed below, the GENIUS Act lays the groundwork for a potential “Subprime 2.0” financial crisis that may be more catastrophic than the global financial crisis of 2007-09. By validating uninsured and poorly regulated nonbank stablecoins alongside risky crypto derivatives, the GENIUS Act has significantly heightened the chances of future runs on stablecoins and fire sales of crypto derivatives, which could trigger profound crises across our financial markets, adversely affecting the wider economy.
Furthermore, the GENIUS Act enables major technology companies and other commercial entities to enter the stablecoin market and establish a crypto-driven banking framework. This opens up significant risks that future cryptocurrency downturns could ignite widespread economic turmoil. Given the enormous federal debt and the rapid rise in debt servicing costs, federal agencies may find it nearly impossible to facilitate another round of comprehensive bailouts without instigating a sovereign debt crisis.
To eliminate the severe risks associated with uninsured nonbank stablecoins and crypto derivatives, Congress should repeal the GENIUS Act. It should also legislate that only FDIC-insured banks can issue stablecoins and that all crypto derivatives adhere to the prudential rules established by Title VII of the Dodd-Frank Act for non-digital derivatives.
Uninsured Nonbank Stablecoins Are Prone to Investor Runs—A Risk the GENIUS Act Will Not Mitigate
A stablecoin is a type of crypto-asset promising that its value will remain stable against a designated fiat currency or a group of assets. Around 98% of all global stablecoins are pegged to the U.S. dollar. These dollar-pegged stablecoins function similarly to bank deposits, as issuers claim they will redeem or transfer these stablecoins at a 1:1 ratio upon demand by holders.
The global stablecoin market is heavily consolidated, with Tether’s USDT and Circle’s USDC representing over 80% of the total $300 billion market cap of all stablecoins. Most stablecoins primarily serve as payment methods for trading volatile crypto-assets, with approximately 90% of transactions linked to crypto trades.
Additionally, stablecoins are frequently misused for illegal transactions. In 2023, stablecoins facilitated 60% of unlawful cryptocurrency activities, encompassing scams, ransomware, capital control evasion, money laundering, and tax evasion, as well as 80% of transactions conducted by sanctioned entities and terrorist organizations.
While dollar-linked stablecoins are occasionally used for cross-border remittances and standard payments—particularly in developing nations facing high inflation and unstable currencies—they account for only 6% of transactions. Moreover, many governments see stablecoins as a threat to monetary sovereignty and consider measures to limit or ban their use.
Despite the assurances of stablecoin issuers, their stability is frequently compromised. Over 20 stablecoins collapsed between 2016 and 2022, and major stablecoins like USDT and USDC have lost their “pegs” on multiple occasions since 2019.
The nature of nonbank stablecoins makes them inherently unstable as they primarily operate as “casino chips” for crypto trading. Assets like Bitcoin and Ethereum illustrate extreme price volatility, largely because they lack substantial underlying assets and do not generate independent cash flows outside of speculative transactions on their blockchains. The crypto market has seen dramatic boom and bust cycles, including a major boom in 2020-21, the “crypto winter” of 2021-22, a subsequent slow recovery, and a resurgent boom in 2024 that momentarily dampened earlier this year.
When the prices of crypto-assets decline sharply, heavily-leveraged investors are compelled to liquidate their crypto holdings, which includes stablecoins, to address margin calls and other debt obligations. During the “crypto winter” of 2021-22, the total market value of stablecoins dropped from $180 billion to $130 billion, parallel to a staggering 70% decline in Bitcoin’s market cap.
When investors face an obligation to rapidly liquidate stablecoins, they depend on the capability of issuers and exchanges to provide prompt redemptions at the “pegged” value of $1 per coin. The GENIUS Act allows nonbank stablecoin issuers to maintain substantial reserves in uninsured financial instruments, such as unsecured bank deposits, money market funds (MMFs), and repos. Unfortunately, these uninsured reserves expose issuers to significant disruptions in traditional financial markets. For instance, during the regional banking crisis of 2023, it was revealed that Circle, which held $3.3 billion (8%) of USDC’s reserves at Silicon Valley Bank (SVB), was among its largest uninsured depositors. Following SVB’s collapse, USDC broke its $1 peg, plummeting to $0.87, prompting a run from stablecoin holders who forced Circle to liquidate $8 billion of assets. Although USDC narrowly avoided a total collapse—potentially triggering a systematic crash across crypto markets—this was only due to federal regulators invoking a systemic risk exception, eventually providing a bailout to Circle and other uninsured depositors at SVB.
As noted by SEC Commissioner Caroline Crenshaw in April 2005, “there is always a risk, particularly in times of market stress or if the price of a stablecoin drops, of a ‘run’ scenario” wherein crypto exchanges and stablecoin issuers “cannot honor all redemption requests in real time,” thereby triggering a “self-reinforcing cycle of redemptions and fire sales of reserve assets.” The runs seen on nonbank stablecoins echo those experienced with uninsured deposits, MMFs, repos, and other short-term financial instruments during numerous U.S. financial crises throughout history. The government has intervened to shield uninsured depositors during financial crises in 1980-92, 2008-09, and 2023 to stave off full-blown economic depressions.
Past crises illustrate that uninsured nonbank stablecoins, much like other uninsured short-term financial claims, are highly susceptible to investor runs whenever confidence erodes regarding the ability to redeem those claims promptly. The GENIUS Act fails to heed historical lessons, establishing an inadequate regulatory framework for stablecoins, neglecting to create a federally-managed insurance fund or a designated lender of last resort to ensure timely repayments, and relying solely on a flawed bankruptcy system, which is likely to incite stablecoin holders to flee at the first hint of trouble.
The GENIUS Act Will Not Enhance Our Payments System or Boost Financial Inclusion
Proponents argue that uninsured nonbank stablecoins will substantially enhance the U.S. payment infrastructure and promote financial inclusivity. However, nonbank stablecoins utilizing unregulated public blockchains do not offer a practical solution for delivering efficient and cost-effective payments at scale. These public blockchains face two fundamental issues: lack of scalability and immutability, preventing the rectification of erroneous, fraudulent, and unauthorized transactions. These two obstacles—rooted in the basic principles of public blockchains—render them unsuitable for high-volume financial operations.
To address the scalability issue, public blockchains have explored “Layer 2” strategies such as sidechains and off-chain processing, which delegate transaction validation to designated groups responsible for reporting results back to the public blockchain. However, these strategies shift the responsibility to trusted entities, effectively resembling permissioned distributed ledgers managed by traditional financial institutions such as banks and clearinghouses.
As soon as public blockchains adopt operational methods akin to permissioned ledgers, they become financial intermediaries and erase any rationale for differing regulatory treatment compared to conventional financial entities. SEC Commissioner Crenshaw raised a compelling point in January 2024, remarking, “If [public blockchain] technology is so revolutionary, why do so many of its applications seem to revolve around recreating the existing financial system—with less regulation, increased opacity, reduced investor protections, and heightened risk?”
Furthermore, nonbank stablecoins have shown no capacity to enhance financial inclusion. Individuals must possess bank accounts to convert fiat currency into stablecoins and vice versa. Moreover, they require internet connectivity and financial literacy—attributes often absent in “unbanked” demographics. The crypto sector has a troubling history of preying on underserved communities through deceptive marketing of high-risk crypto-assets and exploiting high-fee “crypto ATMs” that facilitate crypto scams.
For true advancements in a more efficient, affordable, and inclusive payments system, Congress should enact legislation that (i) encourages tokenization of deposits on permissioned distributed ledgers managed by FDIC-insured banks, (ii) accelerates the rollout of real-time banking settlement services, and (iii) mandates FDIC-insured banks to offer low-cost “Bank On” deposit accounts with accompanying payment services for low-income individuals and families meeting specific criteria. This legislation would foster significant enhancements to our payment systems while promoting financial inclusivity without jeopardizing the stability and efficacy of federally-insured banking.
The GENIUS Act Fuels a “Shadow Banking 2.0” Crypto Framework and Ignites a “Subprime 2.0” Crypto Bubble.
The GENIUS Act legitimizes uninsured nonbank stablecoins as a perilous new type of “shadow deposits,” akin to MMFs, thereby cultivating a risky “Shadow Banking 2.0” crypto paradigm. It enables nonbank stablecoin issuers to drain substantial deposits from FDIC-insured banks, as the GENIUS Act allows stablecoin affiliates and crypto exchanges to offer “rewards” on these stablecoins. This deposit removal significantly hampers community and regional banks’ capacity to extend vital loans to consumers and local businesses. Nonbank stablecoin issuers cannot compensate for these lost loans since their assets must be primarily engaged in short-term financial instruments held as reserves.
Additionally, the GENIUS Act permits nonbank stablecoin issuers to market an astonishing array of crypto derivatives and other crypto financial products authorized by federal and state regulators as “incidental” to crypto asset services. Crypto derivatives—which include futures, options, and swaps—account for roughly three-fourths of all crypto trading, and a significant portion of these transactions occur on unregulated foreign exchanges. Perpetual futures contracts allow investors to make leveraged long-term predictions on price movements in crypto without holding the assets themselves.
Moreover, the SEC has authorized crypto exchange-traded funds (ETFs) that track various crypto-assets’ values, leading to a rapid increase in crypto ETFs and the emergence of “crypto treasury companies” that invest in these assets. The proliferation of high-risk crypto derivatives and additional speculative financial products is inflating a “Subprime 2.0” crypto bubble, characterized by a multitude of leveraged positions on highly volatile crypto-assets that lack substantial underlying assets or independent revenue streams. This burgeoning speculative nexus mirrors the toxic derivatives pyramid surrounding subprime mortgages that propelled the 2007 “Subprime 1.0” credit boom.
The unraveling of the “Subprime 1.0” credit boom precipitated a global financial crisis. Likewise, the unraveling of the speculative crypto bubble derived from “Shadow Banking 2.0” and “Subprime 2.0” is poised to incite a comparable crash with dire consequences for our financial ecosystem and economy. Federal agencies will face great challenges in managing such a crisis with bailouts on par with those during the 2008-09 and 2020-21 crises. Given the federal government’s substantial debt load, executing such bailouts is likely to incite a crisis in Treasury bonds and provoke depreciation of the U.S. dollar.
The GENIUS Act Paves the Way for Big Tech Firms and Other Entities to Engage in Crypto Banking, Exacerbating Current Crypto Bubble Risks
The GENIUS Act grants Big Tech firms and other commercial enterprises the ability to acquire nonbank stablecoin issuers, thereby establishing their own crypto-financial empires using these issuers’ resources and services. Companies such as Alphabet (Google), Amazon, Apple, Meta (Facebook), Walmart, and X are already strategizing on how to offer stablecoins. The GENIUS Act permits privately-held tech companies, including Elon Musk’s X, to acquire stablecoin issuers. It also allows the “Stablecoin Certification Review Committee,” led by Treasury Secretary Bessent, to sanction acquisitions by publicly-traded Big Tech firms and other commercial entities.
By dismantling the long-standing separation between banking and commerce, the GENIUS Act introduces substantial dangers for consumers and local businesses. The involvement of Big Tech firms in issuing and distributing stablecoins grants them access to sensitive financial information about their customers, enabling the potential for extensive surveillance, commercialization, and monetization of private data.
Acquisitions of stablecoin issuers by major tech companies will create a new category of “too-big-to-fail” financial institutions, escalating the risk that any future crypto downturns could engulf the economy at large, yielding catastrophic results for our financial system, economy, and society.
Conclusion
The GENIUS Act constitutes a harmful law that poses serious and unacceptable risks to our financial future. It is imperative for Congress to address these concerns by (1) repealing the GENIUS Act and mandating that only FDIC-insured banks can provide stablecoins, and (2) establishing regulations to ensure that all crypto derivatives abide by the existing rules for non-digital derivatives laid out in the Dodd-Frank Act.
