The problem with stablecoins | #337

And how they could trigger a financial crisis

Dec 08, 2025

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This week:

The problem with stablecoins
How stablecoins could trigger a financial crisis
Final Operation Choke Point 2.0 report published
Stuff happens

1. The problem with stablecoins

The NYTimes published a new overarching report covering stablecoins, highlighting both the high hopes and potential follies of the fully-backed, permissionless approach to digitizing money.

Despite tepid crypto markets, it’s been a banner year for U.S.-dollar backed stablecoins, aided by regulatory clarity thanks to the GENIUS Act. And why not? The benefits of internet native digital dollars are straightforward—global, always-on accessibility, fast and basically free transfers.

Here’s the NYTimes (via Greg Kidd):

With the passage of the GENIUS Act, the Trump administration’s signature crypto policy, the adoption of stablecoins is projected to skyrocket.
The Federal Reserve estimates that the total market could be worth $3 trillion in five years. That’s nearly the entire 2024 gross domestic product of France, according to the World Bank.
Industry giants are celebrating. “We love, we love the GENIUS Act,” said Rubail Birwadker, the global head of growth at Visa, which has expanded into stablecoin payments. He added that the new regulation “makes it so much easier for more legitimate banks, technology companies, others to actually enter the ecosystem because they know exactly what they’re getting into.”

But that rapid adoption can bring risks for consumers due to both lack of protections and transparency:

Financial experts worry that the increasing adoption of these cryptocurrencies could pose large risks to the financial system. You can use them to easily move official money into digital currencies and back again. But they do not come with deposit insurance, like money in a savings account from a bank will have. There are no fraud protections. And there is scant regulation in place to make sure people are not using them for illegal transactions.
Stablecoin companies “enjoy the privileges of being a bank without the responsibilities,” said Corey Frayer, a former official at the Securities and Exchange Commission focused on crypto policy and a director at the Consumer Federation of America, a consumer advocacy group.
…
The lack of transparency worries Mr. Frayer. He predicts that payment companies will slip stablecoins into updated terms of service, so consumers unknowingly agree to crypto transactions every time they swipe their card. But those transactions “will come with none of the protections” that Americans expect, like chargebacks and fraud protection, he said.
Mr. Frayer warns that the proliferation of the coins echoes a dangerous era in American finance. In the 19th century, before federal regulations, private banks issued their own currencies that frequently collapsed, wiping out people’s savings.

And the most popular stablecoin continues to raise questions:

On Nov. 26, S&P Global, a ratings firm, downgraded its assessment of Tether’s holdings to “weak,” the firm’s lowest rating, citing “persistent gaps in disclosure” and overreliance on high risk assets like bitcoin, gold and corporate bonds.
In a statement, a Tether spokesperson said its currency “has remained stable through banking crises, exchange failures, and extreme market volatility.” Since the New York attorney general settlement years ago, Tether has increased its holdings of safe assets, the company said.

2. How stablecoins could trigger a financial crisis

Here’s the Atlantic (via Thomas Milkey):

Stablecoin issuers are functionally deposit-taking institutions. Like banks, they accept cash on a promise to return these funds on demand. Banks, however, are governed by safeguards to protect depositors, notably deposit insurance. Banks are also subject to quarterly inspections and annual audits. The GENIUS Act forgoes inspections and subjects only the largest issuers—with more than $50 billion in holdings—to annual audits. In this way, stablecoins threaten to revive some of the worst practices of early American banking, when depositors entrusted funds to lightly regulated banks at the depositors’ own risk.
…
When a traditional bank’s holdings decline in value, depositors do not worry much. Their deposits are backed by federal insurance, for which the bank pays a hefty and risk-adjusted fee. If a bank takes more risks with its holdings, it typically pays more for insurance. The bank may fail, but the depositors’ money is safe. No need to run. Stablecoin issuers do not pay for deposit insurance. They are backed exclusively by the assets they hold—assets that rise and fall in value every day, every minute—and face no real-time penalty for chasing higher returns. This ensures that the first warning of trouble will also likely come too late to avoid catastrophe.
…
This mix of imperfect information, lax regulation, and a lack of insurance is the formula for inspiring the kind of anxiety and uncertainty that spur bank runs. If the GENIUS Act ultimately persuades investors around the world to hold more of their U.S.-dollar assets in stablecoin, any whisper of bad news can trigger a crisis. Such crises pose a threat to the larger U.S. financial system because the stablecoin issuers in need of quick cash will have to sell their Treasury holdings. If the GENIUS Actsucceeds in growing these holdings, their sudden liquidation will lower Treasury values for everyone. Interest rates will rise for everyone.

3. Final Operation Choke Point 2.0 report published

The House Financial Services Committee has published its final report on the systematic debanking of the digital assets industry.

From the report:

While digital assets were the target of Operation Choke Point 2.0, “any legal American industry could be next if regulators continue to use banking services as a political weapon.”9 Any business engaging in legitimate, legal business activity should not experience account closure driven by the political preferences of an individual administration or regulator. It is imperative that the patterns of prior administrations are identified and their playbooks understood to help ensure that future administrations cannot choke off businesses and industries simply because the administrations disagree with or do not fully understand them. Committee Republicans aim to prevent an “Operation Choke Point 3.0” and ensure that lawful American businesses are not targeted and denied access to financial services by federal regulators in the future.

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