The danger of stablecoins lies precisely in their appearance of safety.
Source: Uninformed Economics
Bitcoin fell below $90,000 today, effectively reversing all of this year's gains. Unbeknownst to many, the cryptocurrency market has evaporated over $1 trillion in the past six weeks.
Data provider CoinGecko tracks over 18,000 tokens, and since reaching a market peak on October 6, the total market capitalization of these tokens has dropped by 25%, amounting to about $1.2 trillion disappearing.
Analysts point out that "despite institutional acceptance and positive regulatory momentum, the gains in the cryptocurrency market this year have now returned to zero." The Financial Times believes the main reason is market concerns over overvalued tech stocks, coupled with unclear trends in U.S. interest rates, leading to a sell-off of speculative assets.
Amidst the chaos, The Atlantic published a deep commentary titled: "How Cryptocurrency Could Trigger the Next Financial Crisis." However, the article discusses not Bitcoin, altcoins, or Web3, but what many consider the most "stable" and "safe" — stablecoins.
Why are so-called "stable" coins the most dangerous?
The author believes that the risk of stablecoins does not lie in their "instability," but in their disguise of being "too stable."
On the surface, stablecoins are the "anchor" of the cryptocurrency world — they are pegged to the U.S. dollar, facilitating circulation and serving as a "bridge" for the entire market. Whether you are trading coins, engaging in contracts, or arbitraging, you almost cannot do without them.
But it is precisely this "seemingly safe" design that makes them a potential trigger point. Especially after the Trump administration pushed through the GENIUS Stablecoin Act, which will officially take effect in 2027, stablecoins have not only escaped effective regulation but have also gained implicit official endorsement, allowing for faster expansion and absorption of more funds without the prudent oversight, capital requirements, and deposit insurance that banks face.
Once market confidence collapses, issuers may be unable to redeem on time, leading to a digital "bank run" occurring on the blockchain in milliseconds. At that point, the entire U.S. Treasury market and even the global financial system could be shaken by what appears to be the "safest" bomb.
The author points out that this is not an ordinary tech bubble, but a risk factor that could deeply intertwine with sovereign currencies, bond markets, and Federal Reserve interest rate operations. The U.S. may be repeating the mistakes of the 2008 subprime mortgage crisis, but this time, the danger is not in mortgages, but in "on-chain dollars."
The following is the original content:
On July 18, 2025, President Donald Trump signed a law with a rather self-congratulatory name: the GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins Act).
If this act is destined to disrupt the financial system as it appears now, then the name "Genius" will become an irony: who would think it a good idea to let the cryptocurrency industry set its own rules?
The act aims to establish a regulatory framework for a type of cryptocurrency called stablecoins.
Despite the reassuring name, stablecoins — those cryptocurrencies that promise to maintain their value stable against real-world currencies (usually the U.S. dollar) — are currently the most dangerous form of cryptocurrency. Their danger comes from their "appearance of safety."
Most people know that cryptocurrencies are highly volatile and speculative. The values of well-known cryptocurrencies like Bitcoin and Ether fluctuate dramatically every day and year. The original intention of stablecoins was to eliminate this volatility, but they may pose a greater threat to the broader financial system.
The GENIUS Act (similar to the EU's Markets in Crypto-Assets Regulation passed in 2023) provides some safeguards, but these measures may significantly expand the stablecoin market. If — or rather when — these stablecoins collapse, the GENIUS Act almost ensures that the U.S. government will have to provide a bailout worth hundreds of billions of dollars to stablecoin issuers and holders.
We always hear the phrase: "This time is different." In finance, this is often a precursor to disaster. In the early 2000s, the financial industry claimed to have invented a "risk-free asset" by packaging subprime mortgages into bonds (many of which were even rated AAA).
But risk always comes at a cost. Disguising high-risk assets as low-risk assets only allows speculators to reap the rewards while shifting the consequences onto others. In 2007, these "AAA" rated subprime mortgage bonds collapsed, plunging the world into the most severe economic recession since the Great Depression. Stablecoins are similarly engaging in this "alchemy" — turning trash into gold — and may lead to the same outcome.
Today, the stablecoin you purchase for $100 should theoretically still be worth $100 in the future. This design makes it appear to be a reliable way to store digital assets. Stablecoins are crafted to provide safety and liquidity similar to bank deposits within the cryptocurrency system.
However, these "stable" promises are often unreliable. In the 11 years since stablecoins were created, several issuers have defaulted, resulting in billions of dollars in losses.
Terra was once one of the top stablecoin issuers but evaporated nearly $60 billion in assets during a crash in May 2022. As Nobel laureate Jean Tirole stated: "Stablecoins, like money market funds, appear safe but can collapse under pressure."
The GENIUS Act is set to officially take effect in January 2027, with regulatory intentions to attract investors by reducing risks and enhancing stability. But the problem is that these "guardrails" are more about protecting the profits of issuers without effectively reducing the risks to consumers and taxpayers. The result may be that when stablecoins face another crisis in the future, the impact will be greater, and the damage to the real economy will be more severe.
Proponents of stablecoins argue that these cryptocurrencies provide more advanced technology for storing and transferring funds. Bank transfers often take a long time, and international remittances are costly and cumbersome. Stablecoins seem to allow for easy large cross-border transfers, just like paying a babysitter with Venmo.
This promise is not real. For legitimate transactions, cryptocurrencies are still extremely susceptible to fraud, hacking, and theft. According to blockchain analysis firm Chainalysis, nearly $3 billion in cryptocurrency was stolen in just the first half of 2025. In 2024, the CEO of a Texas pharmaceutical company mistakenly sent about $1 million worth of stablecoins to a stranger's account due to a typo in the address, and the recipient refused to return it. The stablecoin issuer Circle also stated it was not responsible, and the company has since sued Circle.
In fact, most cryptocurrency holders do not use it for consumption. A 2023 survey by the Federal Deposit Insurance Corporation (FDIC) found that only 3.3% of cryptocurrency holders use it for payments, and only about 2% use it to purchase actual goods.
The real advantage of stablecoins is that they allow asset holders to use the dollar system while evading U.S. regulation. Currently, about 99% of stablecoins are pegged to the U.S. dollar.
The GENIUS Act claims it will require stablecoin issuers to comply with anti-money laundering laws such as "Know Your Customer" (KYC), but only when these coins are initially issued in the U.S. After that, how they are transferred, to whom, and where they flow is basically untraceable.
For example, Tether plans to launch a new stablecoin that is not aimed at U.S. or EU customers, thereby completely circumventing KYC rules.
At the same time, decentralized exchanges allow people to swap stablecoins without any regulation, making it easy for originally unregulated coins to enter the U.S. market. Although the GENIUS Act requires reporting of suspicious transactions, most of the stablecoin ecosystem exists outside the U.S., making this regulation difficult to enforce.
Because of these inherent risks, the stablecoin market has historically been small, currently ranging between $280 billion and $315 billion, roughly equivalent to the size of the 12th largest bank in the U.S. Even if the entire stablecoin market were to collapse tomorrow, the U.S. financial system might be impacted but could still recover.
However, Citigroup predicts that if the GENIUS Act takes effect, the stablecoin market could balloon to $4 trillion by 2030. A default of this scale could cause severe shocks to the global financial system.
Functionally, stablecoin issuers are essentially "deposit-absorbing institutions." They take in cash and promise to redeem it at any time. Banks have deposit insurance, quarterly inspections, and annual audits. The GENIUS Act, however, abandons these regulatory measures, requiring annual audits only for large issuers with assets over $50 billion.
The GENIUS Act claims it will eliminate default risk by requiring issuers to back their issuance with "liquid assets such as dollars or short-term government bonds" and to publicly disclose reserve compositions monthly. It sounds reliable. But putting cash into short-term assets with maturities of only hours or days yields very low returns.
Cryptocurrency companies have spent tens of millions of dollars on lobbying and political donations to push this act, and they have provided substantial support to President Trump's campaign; they are clearly not in it just to "earn some interest."
The GENIUS Act allows the use of government bonds with maturities of up to 93 days. These bonds typically yield around 4% annually, but they also carry interest rate risk: when interest rates rise, bond values fall. For example, in the summer of 2022, the yield on 3-month government bonds rose from less than 0.1% to 5.4%. If issuers sell off mid-term, they could incur losses.
If you are a stablecoin holder, you might worry that the issuer holds bonds whose value is shrinking. If redemption demand increases, the issuer may manage the first few requests, but ultimately will run out of funds. Once panic sets in, everyone will rush to withdraw, triggering a digital-age "bank run."
Traditional banks, even if their book assets shrink, do not cause customers to worry because there is federal deposit insurance. In contrast, stablecoin issuers have no insurance, relying solely on the assets they hold — these assets fluctuate every minute. Once the market perceives risk, it will be too late.
Supporters of the GENIUS Act argue that it mandates asset diversification, such as requiring a portion to be held in cash, overnight assets, 30-day assets, etc. It does indeed require disclosure. However, this disclosure is severely lagging and cannot keep up with the reality of funds flowing in "seconds." An issuer that appears sound in a monthly report may be insolvent just a week later.
This combination of information lag, loose regulation, and lack of insurance is the perfect recipe for panic and "bank runs." Once more people start using stablecoins to store dollar assets, even a slight disturbance could trigger a systemic crisis. To meet redemption demands, issuers will have to sell government bonds, which could drag down the entire bond market — raising interest rates and hurting everyone.
Take Tether, headquartered in El Salvador, for example; it currently holds $135 billion in U.S. government bonds, making it the 17th largest holder of U.S. debt globally, just behind Germany. In May 2022, Tether faced market skepticism about the authenticity of its reserves and was redeemed $10 billion within two weeks. If it had collapsed at that time, the government could have remained aloof. But now, as its scale grows, the risks cannot be ignored.
The GENIUS Act prohibits certain high-risk assets but cannot change the fundamental issue: the profits from stablecoins come from risk. Tether CEO Paolo Ardoino announced in September that the company is considering financing, with a valuation potentially reaching $500 billion.
This regulatory vacuum of “enjoying government bailouts without paying insurance premiums” is precisely the root cause of the 2008 money market fund crisis. At that time, the federal government intervened to protect $2.7 trillion in uninsured assets.
Supporters believe cryptocurrencies are the currency of the future, while critics label them as scams serving criminal activities. Warren Buffett once said, “Bitcoin is probably rat poison squared.”
Currently, these controversies are irrelevant to most people. For instance, the bankruptcy of the exchange FTX at the end of 2022 had almost no impact on the average economy. But stablecoins are different; they are designed to be deeply intertwined with the real financial system.
The GENIUS Act attempts to make them new buyers of U.S. debt. The White House even stated in a briefing: “The GENIUS Act will increase demand for U.S. Treasuries, reinforcing the dollar's status as the global reserve currency.”
The question is: where will this demand come from? One answer is from criminals. The global scale of “dirty money” is estimated to be $36 trillion, accounting for 10% of global wealth. Stablecoins provide a channel for laundering this money.
In 2023, Binance was fined over $4 billion by the U.S. Treasury for allegedly facilitating transactions for terrorist organizations. In October 2025, President Trump pardoned the founder of Binance, and there were reports that Binance would collaborate with the Trump family's cryptocurrency project.
Why was the GENIUS Act able to pass Congress so easily? The votes in both the House and Senate were 68:30 and 308:122, respectively.
Supporters are skilled at lobbying, beneficiaries are active, and victims are indifferent. Traditional banks believed they were safe because the act prohibits stablecoin issuers from paying interest. However, the stablecoin industry is working to circumvent this restriction. Now, Goldman Sachs, Deutsche Bank, and Bank of America are considering jointly launching their own stablecoins.
Opponents in Congress, such as Senator Elizabeth Warren, are concerned about the Trump family's massive cryptocurrency interests. She is not wrong. According to the Financial Times, the Trump family has earned over $1 billion in pre-tax profits from the cryptocurrency industry in the past year. One outcome was the Justice Department's announcement in April to significantly reduce investigations into cryptocurrency fraud.
While this corruption is distasteful, it is not a systemic risk. The real danger is: stablecoin issuers want to absorb deposits significantly without any assurance of repayment capability.
History has shown that the U.S. government is unlikely to stand by while large stablecoins default, yet the GENIUS Act does not equip the government with tools to prevent such a crisis.
The act has not yet taken effect, so there is still time to mitigate losses.
We can view stablecoin issuers as financial institutions that absorb deposits, requiring them to pay insurance premiums for U.S. dollar stablecoins, accept event-driven disclosures, and establish headquarters and pay taxes in the U.S. At the same time, the current high-cost cross-border remittance system should be reformed to weaken the cryptocurrency industry's false advantage of “fast transfers.”
After the 2008 financial crisis, investor Jeremy Grantham was asked, “What have we learned from this crisis?” He replied, “We learned a lot in the short term, a little in the medium term, and nothing in the long term.”
Today, stablecoins are reminding us of the crisis with a risk structure similar to subprime securities, long forgotten.
In a free country, the government will not stop you from speculating. But danger arises when speculators use other people's money to speculate — this is the essence of stablecoins, and the GENIUS Act is fostering this trend.
Without intervention, the next financial disaster in the U.S. is just a matter of time.
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