Stablecoin Chaos
Letting private firms flood the market with unstable digital dollars risks repeating America’s 19th-century banking disasters—with Trump’s crypto empire waiting to profit from the fallout.
By Harral Burris
In 19th-century America, almost anyone could open a bank and issue their own currency. These pseudo-dollars circulated at various discounts to actual greenbacks and became worthless if the bank failed, which happened with regularity. If the Trump administration's goal is to take the nation back to the 19th century, unregulated and speculative money will fit right in.
Then, as now, Americans were suspicious of wealthy industrialists and bankers. After President Andrew Jackson closed the Bank of the United States, the country spent the next eight decades without national banking services and at the mercy of charlatans and thieves. Many states passed laws that allowed anyone with a relatively small amount of money to open a bank. Those banks were permitted to issue a currency so long as they held $1 of collateral for every dollar of bank scrip issued. When some of those banks failed, people holding the worthless scrip they issued lost everything. According to The New York Times, one study estimates that the losses in Michigan from discounted or worthless banknotes were as high as $4 million, nearly half the state's income in 1840.
Banking was largely unregulated in this era, and recessions and depressions were frequent. The Panic of 1837 ushered in a prolonged depression that lasted until 1843. The Panic of 1857 followed the failure of a major trust company, and the Panic of 1873 led to a depression from 1872 to 1879. There was another serious slowdown in 1882, followed by a depression in 1893. The Panic of 1907 was so severe that it prompted Congress to take action, leading to the Federal Reserve Act in 1913. Between the closing of the Bank of the United States in 1836 and the creation of the Federal Reserve, the United States experienced a total of 17 distinct periods of recession or depression, accounting for nearly half of the era.
These are the risks the nation is taking by catering to crypto enthusiasts who would profit significantly from issuing their own branded stablecoin. History has shown that the circulation of multiple forms of private currency is a disaster. Alexander Hamilton knew this; Andrew Jackson did not. Trump apparently does not either.
It is worth noting that the term “panic” was used to describe major economic downturns before 1930. President Hoover said that the downturn after October 1929 was not a panic but merely a “depression.” The term stuck.
Crypto enthusiasts claim that blockchain is something new and different, but that reveals a profound misunderstanding of the workings of the modern banking system. A U.S. dollar is, in most cases, simply an electronic entry on a bank's ledger. If you want to hold dollars, you’ll need a bank account, and the bank is required to “know your customer” to ensure you're not a drug dealer or some other type of criminal before opening the account. To send funds to someone, they’ll also need a U.S. bank account, or, if it’s an international transfer, the funds must pass through the heavily regulated SWIFT transfer system. When the US decides to sanction someone, it simply bars them from SWIFT.
A dollar is not so different from a stablecoin; they are both electronic entries on a distributed ledger. Still, the banking system is not nearly as private as the crypto market, where billions circle the globe through various illicit drug and money laundering operations. Once the crypto has found a home, it can be converted into legitimate currency, no questions asked.
Legislation making its way through Congress would give a patina of government regulation to a variety of crypto known as stablecoin, whose value is linked to another hard asset, usually the U.S. dollar. Stablecoin issuers would be required to hold assets equal to the value of stablecoins issued. The act specifies that issuers must maintain $1 of liquid assets for every $1 of stablecoin issued, but it does not explicitly require those assets to be U.S. Treasuries. How convenient. The assets could have dubious value.
If the “Genius Act” (the Guiding and Establishing National Innovation of US Stablecoins Act) becomes law, stablecoins could be issued by any federally insured bank or by companies such as Walmart or Amazon. State governments would regulate companies that issue less than $10 billion of coins, while larger issuers would fall under the jurisdiction of federal regulators.
The intention is to allow thousands of cryptocurrencies to flourish with little regulation. That creates a perfect setting for corruption, and small investors will eventually pay the price. A stablecoin will be worth a dollar only if the underlying assets are worth their stated value. That cannot be ensured in this new system.
Regulators will face an impossible task of overseeing what could be thousands of stablecoins issued by banks and businesses, including Silicon Valley firms and crypto startups. In a financial downturn, investors and savers could end up with thousands of coins, each worth a different amount of real money. No one would want to accept stablecoins for payment of goods and services since the value of the coins is indeterminate.
Suppose the value of a single stablecoin collapses. In that case, panicked investors will rush to redeem other coins, and regulators must intervene to prevent the collapse of the banking payment system. Without government backing, coin issuers will sell off assets at fire-sale prices as they attempt to raise funds to repay coin holders. Treasury prices will collapse, interest rates will skyrocket, and the financial markets will panic. It is a disastrous, but very real scenario.
And all for what? What can you do with crypto that you can’t do with dollars in a bank account? Crypto enthusiasts promote a few applications, but their arguments seem forced. Stablecoins can be accessed and used by anyone with an internet connection and a digital wallet. International money transfers would occur instantly and at a minimal to no cost, compared to the much slower and more expensive SWIFT transfer system. Domestically, stablecoin use would bypass traditional banking and credit card systems, thereby avoiding various fees associated with these systems. Traditional bank transfers can take days to clear; stablecoin transactions settle in seconds, and they operate 24/7.
In countries with a volatile currency, stablecoins pegged to the U.S. dollar offer a cost-effective way to preserve purchasing power. They circumvent currency controls imposed by autocratic governments.
That said, no one is likely to go to their local Starbucks and attempt to purchase a coffee using one of the hundreds of stablecoins. Of course, Starbucks is free to issue its own coin and gladly accept it, possibly even offering a discount. That may work for Starbucks, but it sounds like a glorified gift card.
Other than money laundering, drug trading, and general corruption, there isn’t a need for these things. The Senate Bill specifically prohibits congressional representatives from owning stablecoins, but it conspicuously excludes the President and Vice President from the ban. Trump and his family enterprises are deeply involved in the crypto industry, particularly in stablecoin USD1 issued by Trump-owned World Liberty Financial.
Crypto is an inherently corrupt asset. Is it any surprise that the Trump family would find that sort of investment appealing? Most of us will not.
Hal is a retired investment professional with 40 years of experience in money management. The interface between geopolitics and global investments has always been his area of specialization. History has always been one of his interests and passions, in fact, that’s how Hal and Jeremi became friends in Madison, Wisconsin.