On June 17, the US Senate passed the GENIUS Act, aiming to regulate a type of cryptocurrency known as “stablecoins”.
Even though this move is viewed as a big win for the cryptocurrency sector, a closer look at the law reveals how it could, quite easily, lead to the next global economic crash.
People are increasingly investing in crypto because its volatile value can lead to huge returns on investment. For instance, Bitcoin (BTC), the oldest cryptocurrency on record, surged the most on Monday by climbing over $120,000 per BTC.
Since the factors that determine its price are often unclear, crypto investment is essentially a roll of the dice. Making profits on crypto trading is often as likely as winning at roulette.
Bid to make crypto credible
The crypto industry realised that the high volatility and unpredictability of crypto currencies will pose a barrier in attracting more risk-averse investors, reported The Conversation.
Hence, to create the appearance of stability, companies began to create “stablecoins”—cryptocurrencies whose prices are pegged to another currency.
In this case, the companies had to hold an equivalent amount of pegged currency in reserve so that the investors could sell the currencies anytime and demand the sale amount in that particular currency.
How safe are the ‘stablecoins’?
Now that the GENIUS Act has passed through the US Senate, big companies like Amazon and Walmart are already planning to issue their own stablecoins for customers.
Since the GENIUS Act will actively regulate stablecoins, people may believe that all stablecoins are equally safe. However, this is impossible to guarantee, and several questions remain about how businesses will leverage their own stablecoins to their advantage.
Next global financial crisis
The potential for stablecoins to trigger a financial crisis draws parallels to historical currency crises, where a country, instead of a company, issues a pegged currency.
Argentina is one such example. From 1991 to 2002, the Argentinian Central Bank promised to exchange one peso for $1, but this artificial peg distorted trade and ultimately led to economic collapse when it was removed.
If big US companies start issuing USD-pegged stablecoins during their successful period and later their finances take a turn for the worse, it would cause a bigger crisis in the market.
The company would finance the coins with assets such as US treasury bills or bonds to guarantee the coin’s value.
The Conversation report points out that if one company collapses, it would set off a chain reaction. Investors would then start returning stablecoins, prompting the company to sell off its USD holdings (US treasury bills) to calm nervous investors.
The impacts might soon start to ripple outwards. A selloff of US bonds would decrease the price of bonds themselves, causing US interest rates to spike.
A sudden, unexpected, and drastic increase in US interest rates could easily translate into a global financial crisis, as banks and governments all around the world would suddenly face solvency crises.
Regulation is not a guarantee
Despite the regulators ensuring that the companies have enough reserves to fulfil their promises if investors start to panic, there’s a high chance that things might take a turn.
Just a few years ago, they failed to notice that Silicon Valley Bank had too many assets at risk of an increase in interest rates, an oversight that caused the bank to collapse in 2023.
It is therefore not difficult to imagine a situation where multiple companies are able to irresponsibly issue too many stablecoins. If this happens, the consequences could be dire, not just for the US, but for the entire global economy, the publication reported.
