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Thursday links: Stablecoins are in the eye of the beholder
Writing in The Atlantic, David Frum warns that stablecoins are “by far the most dangerous form of cryptocurrency” and that by legalizing them, the GENIUS Act has “lit a fuse to America’s next financial catastrophe.”
Specifically, Frum expects stablecoin assets to surge to $4 trillion (citing an estimate from Citi), and that nearly all $4 trillion of it will go into three-month Treasurys (the riskiest asset issuers are allowed to buy under the GENIUS Act).
Then, he says, there will inevitably come a time when Treasurys crash — as they did in 2022-2023 — which will cause a bank run on stablecoins as holders withdraw their money before issuers are forced to realize their marked-to-market losses on the $4 trillion of Treasurys they hold.
Better yet, Frum thinks stablecoins “bristle with all the dangers of subprime-mortgage securities” and will end up forcing the government to socialize the losses it creates with a 2008-style bailout.
But the 2022-2023 crash in Treasurys played out over 18 months.
So it’s unclear to me why an 18-month decline in an asset that matures every three months would cause people to panic about stablecoin issuers that take no leverage.
But I present Frum’s take here because 1) it’s kind of amusing in its alarmism and 2) it probably represents what a lot of non-finance people are thinking: Stablecoins are dangerous because they will inevitably fail.
Writing for the IMF, Hélène Rey warns that stablecoins will be such a success that they’ll “threaten government revenues…and destabilize the international financial system.”
In short, she thinks so much of the world’s savings will be redirected to stablecoins that banks will no longer be able to lend, international governments will no longer be able to borrow, and central banks will no longer be able to set monetary policy.
The knock-on effects of such widespread stablecoin adoption will include “financial stability risks, potential hollowing out of the banking system, currency competition and instability, money laundering, fiscal base erosion, privatization of seigniorage and intense lobbying.”
Most alarmingly, Rey worries that this privatization of seigniorage will result in “significant wealth accumulation by…a few companies and individuals,” thereby undermining “the public good dimension of the international monetary system.”
Yikes.
“We must brace ourselves for substantial consequences,” she concludes.
Like Rey, the Federal Reserve’s Steven Miran values our dollar-based international monetary system: “The reserve assets and currency provided by the US are global public goods.”
But that leads him to the opposite conclusion on stablecoins: “Stablecoins might establish an easier means for the financially repressed to enjoy these global public goods and evade draconian restrictions on their finances.”
Crypto people generally think of the Fed’s reserve assets (all the money it prints, basically) as a public bad.
But Miran is right on both substance and tactics: Framing US fiat as a public good is likely the best way to counter the anti-crypto arguments represented by The Atlantic and the IMF.
Unlike Frum and Rey, Miran sees “little prospect of funds broadly fleeing the domestic banking system” — mostly because the GENIUS Act mandates that they do not pay yield and are not FDIC guaranteed (the flip side of Frum’s argument).
Instead, the “real opportunity in stablecoins is to satiate untapped foreign appetite for dollar assets from savers in jurisdictions where dollar access is limited.”
While Rey views this unsatiated appetite for dollars as a threat to all non-US governments, Miran says it's a benefit to non-US people — because it “leapfrogs the challenges of high and unstable inflation or volatile exchange rates.”
It’s a convincing argument; certainly the most convincing of the three presented here.
But only if you can bring yourself to agree that fiat is a public good.
David Beckworth says that stablecoin alarmism “overlooks an important point: the widespread adoption of dollar-based stablecoins could actually help dampen the global financial cycle.”
Beckworth cites the aforementioned Hélène Rey, who has detailed the destabilizing effects of emerging market borrowers doing so much of their borrowing in US dollars.
Stablecoins, Beckworth says, could fix this by reducing the currency mismatch on private-sector balance sheets: When a strengthening dollar increases the value of dollar-denominated debts, the simultaneous increase in the value of their stablecoins will cushion the shock for emerging markets.
In other words, “stablecoins can act as a decentralized balance sheet stabilizer” for the global economy.
Combined with the likelihood that the Federal Reserve will “act as a backstop” to stablecoins in a future crisis — the very thing David Frum worries about! — the spread of stablecoins “may become one of the very tools that softens the peaks and troughs of the global financial cycle.”
“What had central bankers shaking in their boots," Beckworth concludes, “may end up being what steadies the ground beneath them.”
Firas Isa, founder of an Illinois-based crypto ATM company, has been indicted on charges of money laundering — a reminder that despite the transparent nature of blockchains, many criminals believe the first step in laundering money is to put it onchain.
The (alleged) fact that Isa was able to collect $10 million of fees for converting stolen cash into cryptocurrency demonstrates that crypto crime isn’t just about stealing money that’s already onchain — it’s about laundering funds that were stolen off-chain, too.
Many worry this will get even easier as stablecoins get bigger and more integrated into the traditional banking system.
Hélène Rey, for example, says stablecoins could “help channel money linked to illicit or sanctioned activities and substantially erode the tax base of many countries.”
David Frum says “there is something perverse about a plan to boost demand for Treasury debt by making it easier for crooks to circumvent US laws against terrorist financing and money laundering.”
I don’t have a counterargument to cite against either of those takes, unfortunately.
Stablecoins recently made for perhaps the dullest exchange in UK parliamentary history when Lord Kulveen Ranger asked His Majesty’s government what it thought of them.
Responding on behalf of the King, Lord Livermore predicted that stablecoins will be useful in “reducing costs and enhancing efficiencies” in international payments.
As hot takes go, that is less newsletter-worthy than predictions that stablecoins will cause the next financial crisis, undermine the global financial system, save the global financial system or facilitate crime.
But it’s much more likely, too.
— Byron Gilliam
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