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Stablecoin Wildcat-Bank Roulette: The Genius Act Gambles with America’s Money
History potentially rhymes, as Congress toys with private stablecoin currencies, and becomes an apprentice sorcerer playing with demons—or at least with financial crisis...
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Share Brad DeLong's Grasping Reality
Down the hall from my office, Barry Eichengreen is quite annoyed:
Barry Eichengreen: The Genius Act Will Bring Economic Chaos <https://www.nytimes.com/2025/06/17/opinion/genius-act-stablecoin-crypto.html>: ‘If Donald Trump and his allies have their way in Congress, America could soon see… bank failures, personal bankruptcies and financial instability… regularly… unleash[ed]… chaos.. [from] the Genius Act… [which] would give hundreds… of American companies the ability to issue their own currencies… bypass[ing] the banking system and credit card networks.… America had a similar banking system more than 150 years ago, and it unleashed chaos and financial ruin….
[In] the Free Banking Era… sometimes the system worked, particularly in states like New York where strict regulation ensured that banks held enough assets…. But in others, those assets were sometimes all but worthless…. One estimate places the losses to Michigan residents from discounted or worthless bank notes as high as $4 million, almost half the state’s income in 1840…. Regulators have… [enough] trouble keeping an eye on insured banks, [so] 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? The major crypto investors behind the Genius Act must know this; some of them were Silicon Valley Bank’s biggest customers….
Those are risks we are taking on by catering to crypto enthusiasts… [and others] who would in all likelihood profit substantially from issuing stablecoins with the government’s imprimatur. The arrow of history points away from the private provision of multiple kinds of money…. It seems like everything new is old again…. When Mr. Trump describes the [high-tariff] late 19th century as a time when Americans “were at our richest,” maybe someone should remind him that life expectancy was just over 40, and real income was 11 percent what it is today…
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The principal senators who pushed the Genius Act through its Senate passage 68-30 appear to be Bill Hagerty (R-TN), Tim Scott (R-SC), Cynthia Lummis (R-WY), Kirsten Gillibrand (D-NY), and Angela Alsobrooks (D-MD). Its principal pushers in the House appear to be Bryan Steil (R-WI) and Rep. French Hill (R-AR), together with Tom Emmer (R-MN), Josh Gottheimer (D-NJ), Ritchie Torres (D-NY), Byron Donalds (R-FL), and Zach Nunn (R-IA). An interesting crew. Strongly opposed is Elizabeth Warren (D-MA), who usually knows what she is talking about. Also strongly opposed is Jeff Merkley (D-OR), who always knows what he is talking about. Maxine Waters (D-CA), Stephen Lynch (D-MA), Al Green (D-TX), Ayanna Pressley (D-MA), and Rep. Rashida Tlaib (D-MI) lead the opposition in the House.
But it may well be too late to stop this train.
What is my view? First, it is that Barry is right. Second, it is that everything that is good about company-issued stablecoins would be much better achieved by looking to the European Union, and following their lead in capping interchange fees. That would provide substantial savings to businesses and consumers without handing understaffed regulators a safety-and-soundness supervision burden they will not be able to satisfactorily bear.
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If the current draft of the Genius Act becomes law, I think the odds are good that my successors teaching economic history 50 years hence will have to distinguish the Mortgage Great Recession from the Crypto Great Recession.
It is a fact that the rapid growth of stablecoins—crypto tokens pegged to assets like the US dollar—has quietly transformed them from a small sideshow into a genuine risk for the global financial system. Already stablecoin operators may hold more Treasury bills than even major foreign investors like China. Should money flows out of stablecoins, operators would be forced to sell Treasuries and whatever other assets they hold claiming they are safe. This is a system made for a positive-feedback destabilizing interest rate and loss-of-confidence loop—the kind of thing that generated the 2008-2010 Great Recession. The kind of thing we saw appear on the horizon with amazing speed with the extraordinarily rapid collapse of Silicon Valley Bank.
The stablecoin sector is opaque, lightly regulated, and growing fast. As it grows, the requirement for stricter disclosure and tighter regulation grows muh faster. But under this second Trump administration no such thing will happen. What happens in crypto can no longer stay in crypto. The risks are now and will become increasingly everyone’s problem.
And there is a problem that growth of stablecoins might help to solve. Begin by recalling the function of interchange fees. Every time you swipe your credit or debit card, a percentage—typically 1-3%, depending on the network and card type—flows from the merchant to the bank that issued your card. This is the result of a complex dance between network power, market structure, and regulatory lassitude. The credit card companies, wielding their substantial market power, set these fees. Banks, eager for a slice of the action, do not try to compete them down. Merchants and consumers, meanwhile, are left holding the bag, splitting processing fees vastly in excess of any real resource costs.
Stablecoin advocates—those most enthusiastic for the Genius Act—argue that their digital creations will disintermediate this system, offering faster, cheaper, and more transparent payments. They may well be right. Stablecoins do have yet to demonstrate that they can deliver payments at scale with the reliability and transactor protections that the existing system provides. But they may well. So it is not completely crazy to be willing to make this Devil’s Bargain, reducing the costs of financial oligopoly at the price of adding the risks associated with the potential for fragmentation of the payment system, regulatory arbitrage, and the very real possibility of catastrophic runs.
Federal Reserve Chair Jerome Powell is cautious. He is very clear about the need for comprehensive, robust federal regulation of stablecoins. He believes that “establishing a legal framework for stablecoins is a good idea,” because these digital assets are “a form of money” and thus “robust federal oversight” is essential. “Depending on what’s in it, [a stablecoin bill] is a good idea. We need that. There isn’t one now.” And it is the “depending on what’s in it” that is the crux. What needs to be in it is a regulatory-and-supervision system to check every stablecoin issuer or group of issuers large enough to threaten to create systemic risk. And the Genius Act does not do enough. There is no “living will” regime for stablecoin issuers. There is no requirement for stress testing or scenario analysis of the kind we now demand from systemically important banks. Nor is there any clear, specified, pre-funded resolution régime established.
These absences tilt the balance against the Genius Act.
The balance is especially tilted against because there is a better way than hoping that stablecoin competition will push credit-card companies to substantially lower fees. That might work. We know that interchange fees are not set by market forces in a competitive market. Network externalities and strategic behavior rule instead. We know that these forces have given the United States extremely high such fees.
But elsewhere the workings of these monopoly-generating forces generating high fees have been overriden. The European Union has capped them since 2015.
And there have been no bad consequences.
Banks here in the U.S. argue that lower interchange fees will force them to cut back on rewards programs or raise fees elsewhere. Perhaps. But the European experience suggests that the magnitude of these effects is modest. The sky did not fall. Financial innovation did not wither on the vine. The credit- and debit-card businesses are still profitable ones that are well-served in Europe. They are just not ludicrously and obscenely profitable.
European merchants pay less, consumers face lower prices, and the payments system continues to function—efficiently, securely, and with a single, universally accepted unit of account. The monetary system has not fragmented into a patchwork.
Economists from Walter Bagehot to Milton Friedman and beyond have taught us that the “singleness” of money—the ability of a dollar to be accepted everywhere at face value, without question or discount—is a public good of the highest order. To jeopardize it in the pursuit of lower transaction costs is, to put it bluntly, a dangerous folly, when there is proven alternative.
A cap on interchange fees targets the problem directly. It reduces the rents extracted by the payments oligopoly, channels the savings to merchants and consumers, and does so without potentially undermining the integrity of the financial system. The only ones made worse off are the executives, shareholders, and option-holder of the credit-card companies. of Visa and Mastercard, who are unlikely to elicit much public sympathy.
Capping interchange fees is a policy with clear, broad-based benefits. It reduces costs for merchants, lowers prices for consumers, and preserves the integrity of the monetary system. It is, in short, the kind of technocratic, evidence-based reform that has served the American economy well in the past. It is not flashy. It does not promise to “disrupt” or “revolutionize” the payments landscape. But it works.
With an interchange fee cap, the Genius Act would reveal itself as hat it is: a solution in search of a problem.
Note that the push for stablecoin deregulation is not, at its core, a grassroots movement for consumer empowerment. It is, rather, a campaign by a well-financed coalition of crypto investors, tech giants, and financial intermediaries—many of whom stand to profit handsomely. Their interests are not aligned with those of the broader public, which has an overriding interest in financial stability.
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If reading this gets you Value Above Replacement, then become a free subscriber to this newsletter. And forward it! And if your VAR from this newsletter is in the three digits or more each year, please become a paid subscriber! I am trying to make you readers—and myself—smarter. Please tell me if I succeed, or how I fail…
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History potentially rhymes, as Congress toys with private stablecoin currencies, and becomes an apprentice sorcerer playing with demons—or at least with financial crisis...
Share
Share Brad DeLong's Grasping Reality
Down the hall from my office, Barry Eichengreen is quite annoyed:
Barry Eichengreen: The Genius Act Will Bring Economic Chaos <https://www.nytimes.com/2025/06/17/opinion/genius-act-stablecoin-crypto.html>: ‘If Donald Trump and his allies have their way in Congress, America could soon see… bank failures, personal bankruptcies and financial instability… regularly… unleash[ed]… chaos.. [from] the Genius Act… [which] would give hundreds… of American companies the ability to issue their own currencies… bypass[ing] the banking system and credit card networks.… America had a similar banking system more than 150 years ago, and it unleashed chaos and financial ruin….
[In] the Free Banking Era… sometimes the system worked, particularly in states like New York where strict regulation ensured that banks held enough assets…. But in others, those assets were sometimes all but worthless…. One estimate places the losses to Michigan residents from discounted or worthless bank notes as high as $4 million, almost half the state’s income in 1840…. Regulators have… [enough] trouble keeping an eye on insured banks, [so] 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? The major crypto investors behind the Genius Act must know this; some of them were Silicon Valley Bank’s biggest customers….
Those are risks we are taking on by catering to crypto enthusiasts… [and others] who would in all likelihood profit substantially from issuing stablecoins with the government’s imprimatur. The arrow of history points away from the private provision of multiple kinds of money…. It seems like everything new is old again…. When Mr. Trump describes the [high-tariff] late 19th century as a time when Americans “were at our richest,” maybe someone should remind him that life expectancy was just over 40, and real income was 11 percent what it is today…
Leave a comment
Subscribe now
The principal senators who pushed the Genius Act through its Senate passage 68-30 appear to be Bill Hagerty (R-TN), Tim Scott (R-SC), Cynthia Lummis (R-WY), Kirsten Gillibrand (D-NY), and Angela Alsobrooks (D-MD). Its principal pushers in the House appear to be Bryan Steil (R-WI) and Rep. French Hill (R-AR), together with Tom Emmer (R-MN), Josh Gottheimer (D-NJ), Ritchie Torres (D-NY), Byron Donalds (R-FL), and Zach Nunn (R-IA). An interesting crew. Strongly opposed is Elizabeth Warren (D-MA), who usually knows what she is talking about. Also strongly opposed is Jeff Merkley (D-OR), who always knows what he is talking about. Maxine Waters (D-CA), Stephen Lynch (D-MA), Al Green (D-TX), Ayanna Pressley (D-MA), and Rep. Rashida Tlaib (D-MI) lead the opposition in the House.
But it may well be too late to stop this train.
What is my view? First, it is that Barry is right. Second, it is that everything that is good about company-issued stablecoins would be much better achieved by looking to the European Union, and following their lead in capping interchange fees. That would provide substantial savings to businesses and consumers without handing understaffed regulators a safety-and-soundness supervision burden they will not be able to satisfactorily bear.
Give a gift subscription
If the current draft of the Genius Act becomes law, I think the odds are good that my successors teaching economic history 50 years hence will have to distinguish the Mortgage Great Recession from the Crypto Great Recession.
It is a fact that the rapid growth of stablecoins—crypto tokens pegged to assets like the US dollar—has quietly transformed them from a small sideshow into a genuine risk for the global financial system. Already stablecoin operators may hold more Treasury bills than even major foreign investors like China. Should money flows out of stablecoins, operators would be forced to sell Treasuries and whatever other assets they hold claiming they are safe. This is a system made for a positive-feedback destabilizing interest rate and loss-of-confidence loop—the kind of thing that generated the 2008-2010 Great Recession. The kind of thing we saw appear on the horizon with amazing speed with the extraordinarily rapid collapse of Silicon Valley Bank.
The stablecoin sector is opaque, lightly regulated, and growing fast. As it grows, the requirement for stricter disclosure and tighter regulation grows muh faster. But under this second Trump administration no such thing will happen. What happens in crypto can no longer stay in crypto. The risks are now and will become increasingly everyone’s problem.
And there is a problem that growth of stablecoins might help to solve. Begin by recalling the function of interchange fees. Every time you swipe your credit or debit card, a percentage—typically 1-3%, depending on the network and card type—flows from the merchant to the bank that issued your card. This is the result of a complex dance between network power, market structure, and regulatory lassitude. The credit card companies, wielding their substantial market power, set these fees. Banks, eager for a slice of the action, do not try to compete them down. Merchants and consumers, meanwhile, are left holding the bag, splitting processing fees vastly in excess of any real resource costs.
Stablecoin advocates—those most enthusiastic for the Genius Act—argue that their digital creations will disintermediate this system, offering faster, cheaper, and more transparent payments. They may well be right. Stablecoins do have yet to demonstrate that they can deliver payments at scale with the reliability and transactor protections that the existing system provides. But they may well. So it is not completely crazy to be willing to make this Devil’s Bargain, reducing the costs of financial oligopoly at the price of adding the risks associated with the potential for fragmentation of the payment system, regulatory arbitrage, and the very real possibility of catastrophic runs.
Federal Reserve Chair Jerome Powell is cautious. He is very clear about the need for comprehensive, robust federal regulation of stablecoins. He believes that “establishing a legal framework for stablecoins is a good idea,” because these digital assets are “a form of money” and thus “robust federal oversight” is essential. “Depending on what’s in it, [a stablecoin bill] is a good idea. We need that. There isn’t one now.” And it is the “depending on what’s in it” that is the crux. What needs to be in it is a regulatory-and-supervision system to check every stablecoin issuer or group of issuers large enough to threaten to create systemic risk. And the Genius Act does not do enough. There is no “living will” regime for stablecoin issuers. There is no requirement for stress testing or scenario analysis of the kind we now demand from systemically important banks. Nor is there any clear, specified, pre-funded resolution régime established.
These absences tilt the balance against the Genius Act.
The balance is especially tilted against because there is a better way than hoping that stablecoin competition will push credit-card companies to substantially lower fees. That might work. We know that interchange fees are not set by market forces in a competitive market. Network externalities and strategic behavior rule instead. We know that these forces have given the United States extremely high such fees.
But elsewhere the workings of these monopoly-generating forces generating high fees have been overriden. The European Union has capped them since 2015.
And there have been no bad consequences.
Banks here in the U.S. argue that lower interchange fees will force them to cut back on rewards programs or raise fees elsewhere. Perhaps. But the European experience suggests that the magnitude of these effects is modest. The sky did not fall. Financial innovation did not wither on the vine. The credit- and debit-card businesses are still profitable ones that are well-served in Europe. They are just not ludicrously and obscenely profitable.
European merchants pay less, consumers face lower prices, and the payments system continues to function—efficiently, securely, and with a single, universally accepted unit of account. The monetary system has not fragmented into a patchwork.
Economists from Walter Bagehot to Milton Friedman and beyond have taught us that the “singleness” of money—the ability of a dollar to be accepted everywhere at face value, without question or discount—is a public good of the highest order. To jeopardize it in the pursuit of lower transaction costs is, to put it bluntly, a dangerous folly, when there is proven alternative.
A cap on interchange fees targets the problem directly. It reduces the rents extracted by the payments oligopoly, channels the savings to merchants and consumers, and does so without potentially undermining the integrity of the financial system. The only ones made worse off are the executives, shareholders, and option-holder of the credit-card companies. of Visa and Mastercard, who are unlikely to elicit much public sympathy.
Capping interchange fees is a policy with clear, broad-based benefits. It reduces costs for merchants, lowers prices for consumers, and preserves the integrity of the monetary system. It is, in short, the kind of technocratic, evidence-based reform that has served the American economy well in the past. It is not flashy. It does not promise to “disrupt” or “revolutionize” the payments landscape. But it works.
With an interchange fee cap, the Genius Act would reveal itself as hat it is: a solution in search of a problem.
Note that the push for stablecoin deregulation is not, at its core, a grassroots movement for consumer empowerment. It is, rather, a campaign by a well-financed coalition of crypto investors, tech giants, and financial intermediaries—many of whom stand to profit handsomely. Their interests are not aligned with those of the broader public, which has an overriding interest in financial stability.
Get 50% off a group subscription
Refer a friend
Leave a comment
Subscribe now
If reading this gets you Value Above Replacement, then become a free subscriber to this newsletter. And forward it! And if your VAR from this newsletter is in the three digits or more each year, please become a paid subscriber! I am trying to make you readers—and myself—smarter. Please tell me if I succeed, or how I fail…