Threat to financial system from stablecoins

Investment Analysis Clubs Macro Economic Trends and Risks
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I still don’t understand why anyone would want to use stablecoins in financial transactions instead of USDs. (Aside from buying cryptocurrencies which don’t have uses for transactions that are legal.)

Here is a good argument why stablecoins could threaten the financial system and put the taxpayer on the hook.

The Genius Act Will Bring Economic Chaos

By Barry Eichengreen, The New York Times, June 17, 2025

…
What would unleash this chaos is a piece of legislation known as the Genius Act. In its efforts to give crypto a patina of governmental authority and legitimacy, the Genius Act would give hundreds — perhaps even thousands — of American companies the ability to issue their own currencies…

The act specifies that issuers should hold $1 of liquid assets — like U.S. Treasury securities — for every $1 stablecoin they distribute.

This proposal bears an uncanny resemblance to the way America’s monetary system functioned from the mid-1830s until the Civil War, a period known as the Free Banking Era…

The problems that bedeviled 19th-century dollars [issued by banks, not the U.S. government] are likely to be equally debilitating to the stablecoin ecosystem.

Let’s start with prices. Every $1 stablecoin will be worth exactly a dollar only if the system operates infallibly. …

…this system is destined to fail.

Recall the collapse of Silicon Valley Bank two years ago. Regulators realized the bank’s assets were losing value as interest rates rose, yet they failed to react sufficiently until customers recognized the problem, panicked and withdrew their funds so quickly that it pushed the bank to the verge of collapse — basically the same problem that occurred over and over again in the Free Banking era.

If regulators have this much trouble keeping an eye on insured banks, how can they be expected to exercise perfect oversight of hundreds, if not thousands, of stablecoins issued not just by banks but by tech firms and crypto start-ups? …

This brings us to an even bigger issue: economic contagion. …if the value of one or more different stablecoins collapses, panicked investors might rush to redeem their holdings of other tokens. Regulators would feel compelled to step in to prevent the collapse of the payment system. …

Treasury Secretary Scott Bessent, in congressional testimony last month, foresaw a situation where stablecoin issuers [potentially] held $2 trillion or more of Treasury securities. If panicked customers force them to sell these securities, Treasury prices could collapse, sharply increasing interest rates and destabilizing other financial markets and our entire economy… [end quote]

It sounds like the horse has already left the barn. Stablecoins exist and can’t be banned at this point.

The question is how to draw a line between stablecoins and the non-crypto financial system. Is it too late? Would the GENIUS Act make the situation better or worse?

https://www.congress.gov/bill/119th-congress/senate-bill/394/text

Wendy

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Let’s say you are Amazon and issue AmazonCoins that can only be redeemed on Amazon. Since AmazonCoins trade 1:1 they could circulate as regular money. There is precedent for this. Cell money minutes trade like money in Africa. Since Amazon controls the network, it would give Amazon insights into all your spending habits, not just what you spend on Amazon. And the AmazonCoins could have expiration dates, so spend 'em, or lose 'em.

Or let’s say you are a corrupt politician who wants to solicit bribes. You issue your own stable coin, which you then sell to people wanting to buy your influence. You’re not taking a bribe, you are selling financial product (wink, wink). Then the influence buyer burns his coins. Leaving you with a nice, big, fat stack of legal money that you don’t have to report to the FEC.

Lots of nefarious uses if you think about it. This is why Congress is breaking down the door to get this approved.

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I can see the advantage to Amazon, but what’s the advantage to me? I can just use credit cards or USDs. They have more flexibility than Amazon coins.
Wendy

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I see the point. Why go through the extra steps to convert a stablecoin into USD? It is inefficient. However, what if Amazon is rewarding you in AmazonCoins in some way?

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Just a guess, they can give you a discount for buying Amazon bucks - much like they sometimes do with gift cards.

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It allows for untraceable transactions, which can create a shadow economy.

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First, I don’t want to pick on Amazon specifically, because I have no idea if they have any intention of doing any of this. I’m just using them as a proxy.

But let’s say returns are only reimbursed in AmazonCoins. That’s no different that getting a store credit, right? Maybe they throw in some sweetners, like faster shipping when paid with AmazonCoins, or early access to Prime Day deals. And if you use AmazonCoins at Whole Foods, you get the Prime discount without Prime membership. Maybe they partner with some other retailers. Amazon handles the payment processing (formerly done by Visa) and now there is an AmazonCoin ecosystem.

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