This has been a good week for America’s crypto interests. The Genius Act, which legitimates a kind of cryptocurrency called stablecoins, advanced in the Senate, and on Thursday, President Trump held a gala dinner for the top 220 holders of his $Trump memecoin.
That doesn’t mean it’s been a good week for America. Stablecoins, as their name suggests, are crypto assets guaranteed by other assets like the U.S. dollar. Mr. Trump and his sons created one called USD1 through their cryptocurrency company, World Liberty Financial. Digital currencies like stablecoins are bad enough when they could potentially be used for political self-dealing. The potential problems they pose to the mainstream financial system go deeper and are much more concerning.
Their advocates claim that they will enhance U.S. financial power — Mr. Trump said that stablecoins would “expand the dominance of the U.S. dollar.”
They are likely instead to undermine it, fostering scams and sanctions evasion, generating financial risk and perhaps even allowing another currency to supplant the dollar in global trade.
World Liberty Financial said it would back the digital currency with short-term U.S. Treasuries, dollar deposits and other cash equivalents. Just as the U.S. dollar anchors the global financial system, stablecoins provide a standard of value against which cryptocurrencies are measured, without the cost and inconvenience of exchanging them for real U.S. dollars in a regulated bank account.
Crypto interests want to break down the boundary between cryptocurrencies and regulated finance by integrating stablecoins into the regular U.S. financial system. That would allow them to go back and forth between the swashbuckling world of crypto, where cryptocurrencies swing wildly in value and you can gamble on the latest meme, and the rule-bound world of regulated finance, with assets and bank accounts protected by the Securities and Exchange Commission and Federal Deposit Insurance Corporation.
With Mr. Trump in the Oval Office, the crypto industry has an opportunity, but that opportunity is not all due to Mr. Trump. Crypto has received substantial bipartisan support, juiced by generous donations to politicians’ PACs and the defeat of crypto-skeptical politicians. (In 2024 the industry poured $40 million into beating Sherrod Brown, a crypto skeptic, in his unsuccessful Senate re-election race in Ohio.)
Advocates of stablecoins argue that strengthening crypto will strengthen the dollar. Senator Kirsten Gillibrand, Democrat of New York, one of the Genius Act’s co-sponsors, said she worried that America is “just watching while our opponents move pieces on the chessboard” and is “at risk of falling further behind” Europe and China. She is right that other countries are building digital currencies while Mr. Trump opposes plans for a Fed-issued digital dollar.
Since most stablecoins are linked to the U.S. dollar, Ms. Gillibrand says that regulating and promoting them will strengthen dollar dominance. This is not an inherently irrational belief. The U.S. dollar dominates the world, thanks to its unique combination of economic and political stability with a convenient international payments network. This allows the United States to use its central role in globalized finance as a weapon: U.S. economic sanctions can force international banks to choose between serving clients that the United States doesn’t like and having access to the dollar-based global financial system.
Equally, the crypto industry believes that legitimating stablecoins will turn an unruly crypto ecosystem of cryptocoins and exchanges — many of which, it should be emphasized, were invented to circumvent or supplant dollar hegemony and government-backed currencies — into an everyday part of the financial system.
All of that would be great for the industry, but it comes with enormous risk for financial stability across the world. For starters, we can look at the words of crypto enthusiasts who used to dream that a private digital system could displace the dollar. David Sacks, Mr. Trump’s artificial intelligence and crypto czar, once hoped that cryptocurrencies like Bitcoin might become “the new world currency.” American financial hegemony would give way to a private-sector free-for-all.
If crypto becomes normalized, there is plenty of reason to worry that it will spread chaos. Democratic staff members on the Senate Banking Committee say that the Genius legislation would allow U.S. exchanges to trade stablecoins from offshore companies outside the full scope of U.S. regulation. Critics contend that Tether, the dominant stablecoin outside U.S. jurisdiction, has been used by criminals and sanctions evaders to circumvent financial controls. Platforms designed to obscure information about transactions — called mixer services — were implicated in a scheme by North Korean hackers to launder hundreds of millions of dollars.
Even if a robust regulatory structure existed, it would need to be enforced. The Justice Department recently declared that it would not prosecute certain crypto platforms, as a matter of policy, while acknowledging that terrorist groups such as Hamas and ISIS use them to hide their activities from law enforcement. Memecoins have become notorious for scams in which a promoter sells them to the public and then disappears, but indictments are unlikely under a president who sees them as a source of personal profit.
Perhaps the greatest concern about stablecoins is their potential to provoke risk to the entire financial system. Because they are neither fully inside nor fully outside the traditional financial system, they present unique, grave challenges for which there are no clear answers. For example, the Genius Act’s drafters propose regular reports on their implications for financial stability. Yet they have no clear response to a critical question: Does the United States stand behind dollar-based stablecoins or not?
Specifically, if a stablecoin got into trouble or turned out to be a fraud, would it be bailed out? Doing so could create massive liabilities for U.S. taxpayers. Companies that are too big to fail are tightly regulated and supervised, and for good reason.
But not bailing out such a stablecoin would pose a new source of systemic risk for international users of the dollar system. Bank-run crises happen when no one is sure who is exposed to a cascading collapse and how badly, leading the system to freeze up as banks withdraw credit. That is why regulators demand transparency from the big players in the global dollar market.
The company behind Tether offers an illustrative hypothetical. Its chief executive has described, with surprising frankness, how stablecoin issuers who decided to stay in Europe have been forced to turn to smaller banks to hold their deposits because bigger banks don’t want to work with them. Yet if confidence in their stablecoins fell and they were suddenly required to redeem 20 percent of their holdings, these smaller banks would face the equivalent of a deposit run.
Who would act to prevent that kind of panic from spreading to other banks? It would have to be someone with a large capacity to conduct bailouts, in real U.S. dollars rather than seminotional cryptocoins.
You can see why there is no obvious answer to the question of whether the United States should or could stand behind dollar-based stablecoins and why other countries are reportedly trying to reduce their banks’ exposure to dollar funding.
Other countries see America’s push for stablecoins as a threat. If stablecoins become a new weapon under U.S. control, the United States can use them to penetrate still further into other countries’ financial systems. Furthermore, the emerging dollar-crypto nexus might enable criminal finance at an unprecedented scale.
Philip Lane, the chief economist at the European Central Bank, argues that reliance on stablecoins would shift financial activity from euros to private-sector cryptocurrencies based on the dollar. This would render Europe more vulnerable to economic coercion from the United States.
As part of the European Union’s program to build strategic autonomy — its term for weaning itself from dependence on America — the European Central Bank is working as fast as it can on building a digital euro. This would provide an entire alternative payment network. That would provide built-in privacy and security, and, unlike stablecoins, it would be controlled by the public sector.
In this case, stablecoins are not cementing dollar dominance by allowing the United States to catch up with the rest of the world. Instead, they may be incentivizing others’ efforts to get away. Europeans are not only building their escape route but also planning a global alternative to a U.S.-dominated system that seems ever less trustworthy.
The European Central Bank board member responsible for the digital euro has begun talking about the “possible international use” of a payment system that “respects the sovereignty of third countries, mitigates potential risks for them and offers them new opportunities.”
Stablecoins were supposed to leverage dollars to stabilize the chaotic universe of crypto. Instead, they seem set to infect the dollar-dominated financial system with the unique combined chaos of crypto and Mr. Trump.
Dan Davies is the author of “The Unaccountability Machine: Why Big Systems Make Terrible Decisions — and How the World Lost Its Mind” and the newsletter Back of Mind. Henry J. Farrell, a professor of international relations at Johns Hopkins, is an author of “Underground Empire: How America Weaponized the World Economy” and the author of the newsletter Programmable Mutter.
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