The growing value of cryptocurrency is resurrecting one of the most notorious features of the Wild West. Just as stagecoach drivers of the 19th century were ambushed by gold-seeking, gun-toting bandits, crypto holders and their families are increasingly finding themselves victims of violent kidnappings.
If Donald Trump and his allies have their way in Congress, America could soon see a resurgence of other features of that turbulent century, when bank failures, personal bankruptcies and financial instability also occurred regularly.
What would unleash this chaos is a piece of legislation known as the Genius Act. In its efforts to give crypto a patina of governmental authority and legitimacy, the Genius Act would give hundreds — perhaps even thousands — of American companies the ability to issue their own currencies. Imagine Walmart issuing a Walmartcoin, and Amazon doing the same with an Amazoncoin, enabling them to bypass the banking system and credit card networks.
The Trump administration argues that the Genius Act would take our country to a modern future. But what they seem to forget is that America had a similar banking system more than 150 years ago, and it unleashed chaos and financial ruin. Lawmakers should think twice before passing this piece of legislation.
The focus of the Genius Act is a type of crypto called a stablecoin, whose value is intended to be tethered to another, more stable asset, like the dollar. If the act is passed, stablecoins could be issued either by federally insured banks, such as Bank of America, or by companies, such as Walmart and Amazon. Companies that issue less than $10 billion worth of coins could have their currencies regulated by a state. The rest would fall under the jurisdiction of federal regulators.
The intent, evidently, is to let a thousand cryptos flourish.
The act specifies that issuers should hold $1 of liquid assets — like U.S. Treasury securities — for every $1 stablecoin they distribute.
This proposal bears an uncanny resemblance to the way America’s monetary system functioned from the mid-1830s until the Civil War, a period known as the Free Banking Era.
At the time, Americans — like many today — were deeply suspicious of elites and of concentrated financial power. In 1832, President Andrew Jackson vetoed a bill renewing the charter of the Bank of the United States, the closest thing the country had to a central bank, arguing that it favored wealthy interests at the expense of the common people. But in vetoing its renewal, he threatened to leave the United States woefully short of banking services.
Over the next few decades, about half of the states passed laws that allowed anyone with a minimum amount of their own funds to open a bank. Similar to what is being proposed by the Genius Act, every bank was entitled to issue its own dollars as long as they held $1 of collateral for every $1 dollar issued.
Sometimes the system worked, particularly in states like New York where strict regulation ensured that banks held enough assets to back up their currency. But in others, those assets were sometimes all but worthless — resulting in panics and bank runs.
Residents of states like Michigan, where regulation was lax, found themselves holding the bag. 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.
Even when a currency didn’t collapse, 18 states with 18 different regulatory systems resulted in different banks issuing different bank notes, all trading at different prices. That created confusion, since the recipient of a dollar could not always be sure what it was worth.
Shopkeepers would have to inspect each and every dollar offered by prospective customers, rejecting some and accepting others at a discount. Customers wouldn’t even know exactly how many of their dollars they were paying for an item until shopkeepers concluded that unwieldy process. It destroyed something every society needs: the “singleness” of money.
The problems that bedeviled 19th-century dollars are likely to be equally debilitating to the stablecoin ecosystem.
Let’s start with prices. Every $1 stablecoin will be worth exactly a dollar only if the system operates infallibly. The issuer’s balance sheet has to be 100 percent accurate and transparent, and its auditors and regulators would have to be vigilant to ensure that happened. Anyone owning a stablecoin would have to be able to verify that its issuer was actually holding the assets it claimed. Accounting firms responsible under the Genius Act for inspecting those balance sheets would have to efficiently execute their tasks.
If the convulsions of the Free Banking era don’t suffice as an illustration of why these assumptions are wildly optimistic, one need look only at more recent history to understand why this system is destined to fail.
Recall the collapse of Silicon Valley Bank two years ago. Regulators realized the bank’s assets were losing value as interest rates rose, yet they failed to react sufficiently until customers recognized the problem, panicked and withdrew their funds so quickly that it pushed the bank to the verge of collapse — basically the same problem that occurred over and over again in the Free Banking era.
If regulators have this much trouble keeping an eye on insured banks, 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.
If regulators fall short, we will at best be stuck with myriad stablecoins all worth different amounts of money. That could create far bigger problems today than it did in the 19th century, given that our highly integrated economy relies on the smooth operation of its payment system. Producers and consumers need to be able to reliably send and receive payments for goods and services bought and sold. If they can’t, producers won’t produce, and consumers won’t consume. Activity will grind to a halt.
This brings us to an even bigger issue: economic contagion. Back in the Free Banking era, the system was simpler and less interconnected, so the failure of one bank or even a cluster of them couldn’t trigger the collapse of the banking system and the economy. That’s not the case anymore. In the age of social media, rumors about bank insolvencies can spread in minutes — as they did in 2023, when Silicon Valley Bank collapsed.
That’s why the government stepped in and bailed out Silicon Valley’s customers, including those whose balances exceeded the normal $250,000 limit on insured deposits. The government knew that losing those deposits might have provoked a contagious loss of confidence and a run on other banks, destabilizing the entire banking system.
Similarly, if the value of one or more different stablecoins collapses, panicked investors might rush to redeem their holdings of other tokens. Regulators would feel compelled to step in to prevent the collapse of the payment system. Do we really want our taxpayer dollars guaranteeing the value of stablecoins issued by everyone from Big Tech to the Trump family’s crypto firm, World Liberty Financial?
If regulators failed to intervene, the issuers of these stablecoins would have to sell off the assets, likely Treasury securities, they held as collateral to pay coin investors back.
Treasury Secretary Scott Bessent, in congressional testimony last month, foresaw a situation where stablecoin issuers held $2 trillion or more of Treasury securities. If panicked customers force them to sell these securities, Treasury prices could collapse, sharply increasing interest rates and destabilizing other financial markets and our entire economy.
Those are the risks we are taking on by catering to crypto enthusiasts, as well as the crypto firms, tech companies and banks 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. Virtually all economies, and not just that of the United States, have moved to create a more uniform, reliable payment system suitable for a deeply interconnected economy. Fracturing the payment system would only undermine that economy.
It seems like everything new is old again, perhaps because we have unlearned the lessons of our history. When Mr. Trump describes the 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.
Barry Eichengreen is a professor of economics and political science at the University of California, Berkeley.
The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: [email protected].
Follow the New York Times Opinion section on Facebook, Instagram, TikTok, Bluesky, WhatsApp and Threads.
The post This Bill Will Return Us to an Era of Economic Chaos appeared first on New York Times.
