Unpopular Opinion No. 4: Dollar stablecoins aren’t genius
Foreign investors no longer want to buy US government debt, so the plan is to ensure that ordinary people like us soak up the surplus
Good Morning and welcome back to IPEwithSBB,
I’m doing research on stablecoins, especially dollar stablecoins like USDt issued by the digital finance company Tether. As I noted in a July 2023 article, cryptocurrency markets are increasingly important for thinking about the current plight and future status of the US dollar:
[T]he dollar is in trouble, currently facing multiple threats from many quarters. Internally, the US is managing persistent inflation, an ongoing banking crisis, a commercial real estate crisis, and a debt crisis. Add to this increasingly fierce competition with China and massive self-inflicted wounds from the Ukraine war and Russia sanctions, which have induced concerted and cooperative efforts among non-Western countries to de-dollarize. This is the context within which I’m arguing we should understand the SEC’s and BlackRock’s recent moves in crypto markets—as part of the global Currency Wars—with entities in the US trying to defend the dollar against this multi-dimensional, multipolar onslaught. Seen from this vantage point, both the SEC’s regulatory crackdown and BlackRock’s Bitcoin invasion appear as tactical maneuvers to bring cryptocurrency markets into the “global domain of the dollar”, to tame them, domesticate them, control them, limiting the damage crypto can do to the dollar in the future.
The discussion below provides new evidence in support of this reading of events. Since his election, President Trump has fully embraced the strategy I previously identified—one that was only latent in the activities of regulators under President Biden in 2023 but has become explicit and more aggressive under Trump—that is, directing, domesticating, and regulating crypto markets such that they support, rather than compete with, dollar-denominated assets.
In July, with broad bipartisan support in Congress, President Trump signed the GENIUS Act into law. Trump declared that the bill “is going to make America the UNDISPUTED Leader in Digital Assets — Nobody will do it better, it is pure GENIUS! Digital Assets are the future, and our Nation is going to own it. We are talking about MASSIVE Investment, and Big Innovation.”
As I discuss below, among the bill’s provisions are new regulations for stablecoins that explicitly connect demand for dollar stablecoins to the US Treasury market. As Treasury Secretary Scott Bessent stated after Trump signed the Act: “The dollar now has an internet-native payment rail that is fast, frictionless, and free of middlemen. This groundbreaking technology will buttress the dollar’s status as the global reserve currency, expand access to the dollar economy for billions across the globe, and lead to a surge in demand for US Treasuries, which back stablecoins.”
The more I learn about dollar stablecoins, the more I worry about hidden risks and costs. These complex financial instruments are already connected to our daily lives and are poised to become even more so very soon. Our banks are investing in them, and so are the managers of our pension funds. The current US administration views stablecoins as a GENIUS! way to save the dollar and ensure continued demand for US debt. I’m concerned that these decisions may be much costlier than many currently believe.
Risk and Financial Innovation
Modern finance is built on abstractions. Following decades of deregulation and technological development beginning in the 1970s, today entire classes and categories of financial instruments are leveraged in flimsy and precarious layers on top of what economists call the “real” economy. Stocks, for example, are abstract financial bits of a real business that employs people who produce some kind of good or service. When you trade shares of Tyson Foods Inc. (TSN), for example, you’re buying a standardized, tradable unit of ownership in enterprise that produces broiler chickens, chicken nuggets, and other food products.
Then, in turn, equity futures and options markets rest upon the movements of the underlying stock markets, an abstraction to the second degree. The chicken nuggets are even further away now and hard to see. Equity options-based ETFs (an ETF is an “exchange traded fund”) are then leveraged on top of the equity derivatives markets, a third degree of abstraction that renders the chicken nugget virtually invisible.
But distance doesn’t imply disconnection. What happens in markets for financial abstractions affects the underlying markets and the people who rely on them. And vice versa. One of the reasons I enjoy studying finance is because I get to dig through all the technical complexity to identify and understand the connections that bind the abstract to the real—namely, flows of capital, information, and risk—and the consequences of those relationships for ordinary people like us.
To this point, novel financial products that initially appear useful and safe are sometimes revealed to be full of hidden risks and costs. Mortgage-backed securities (MBS) and credit default swaps (CDS) were initially hailed as mechanisms to support homeownership among lower-income households excluded from traditional mortgage markets. But then the Great Recession happened, illuminating the fragile chains of debt and liability that permitted US homeowner defaults to ripple outward, catalyzing a global financial crisis. Instruments that initially funneled liquidity into underserved communities were revealed as engines for systemic risk and financial crisis.
If I had more space to write and you had more time, I could tell you similar stories about other innovations. Like how the development of syndicated loans in the 1970s fed into the catastrophic 1980s debt crisis that devastated Latin American economies. Or about how commodity-index funds were initially situated as a hedge for institutional investors fleeing US mortgage markets in 2007 but ended up contributing to a global food crisis during which a billion people fell into poverty. Or about how over-the-counter energy derivatives trading caused the bankruptcy of a company that’s hard to forget (Enron!!) and catalyzed the 2000-2001 California electricity crisis.
Dollar stablecoins are not yet part of this dangerous financial cohort. But if they get much bigger, which seems almost inevitable at this juncture, they surely could be.
Tokens, Stablecoins, and the USDt
A “token” is a financial abstraction, a digital representation of value. “Tokenization refers to the process of constructing digital representations (crypto tokens) for non-crypto assets (reference assets)” (Carapella et. al. 2023, Federal Reserve Board of Governors, here). “Stablecoins” are specific kinds of tokens issued by private, non-bank entities the values of which are pegged to the value of the underlying reference asset (e.g., fiat currencies, cryptocurrencies, hard commodities). The stablecoins in circulation are backed by reserves from which the company can draw to honor redemptions (see here for an interesting discussion and comparison of tokenized bank deposits versus stablecoins).
According to Tether—the company issues the world’s most popular dollar stablecoin, the USDt, which had a July 2025 market cap of US$160 billion—"Tether tokens are assets that move across the blockchain just as easily as other digital currencies but that are pegged to real-world currencies on a 1-to-1 basis. Tether tokens are referred to as stablecoins because they offer price stability as they are pegged to a fiat currency. This offers traders, merchants and funds a low volatility solution when exiting positions in the market.”
[Notice the explicit emphasis from Tether on how stablecoins make for a smooth “exit”; what Trump is trying to do is to ensure that when investors exit dollar-based markets, they actually end up re-investing, indirectly, in dollar-denominated products, including US government bonds. Neat trick, huh?]
Tether’s website posts current circulation for various stablecoins (on 8/20/2025, there were just over US$167 billion USDt in Tether), as well as the size and composition of its reserves. On August 20, Tether held about 80% of its reserves in cash, cash equivalents, and short-term deposits, most of which (about 82%) are US Treasury bills (bills are short-duration Treasury bonds).
“Reserves” are the collateral that back the 1:1 peg to the dollar, and, in theory, they should cover or exceed the amount of USDt in circulation. If they don’t, stablecoins run the same risk of a “run” that traditional banks do.
Stablecoins, Treasuries, and the GENIUS Act
Writing for Forbes this past April, Carter notes that in 2024 alone, stablecoins processed more volume than Visa and Mastercard combined, facilitating more than US$27 trillion in volume. The author critically notes that the rapidly growing stablecoin market stems largely from the shifting global and macroeconomic environment:
Much of this transformation can be traced back to an imbalance that has been growing for decades. Over reliance on foreign manufacturing, ballooning trade deficits, and geopolitical tensions have chipped away at the U.S.’s unchallenged monetary position. In just the past few months, the Dollar has weakened more than 10% against a basket of global currencies — not because people stopped believing in the U.S. entirely, but because uncertainty is being priced in at the margins.
Jamie Dimon, CEO of JPMorgan, warned that adversaries are actively working to dismantle the Dollar’s hegemonic role. Larry Fink, CEO of BlackRock, said what once would have been controversial: that U.S. debt mismanagement could erode the Dollar’s reserve status.
The U.S. has long preserved Dollar dominance by keeping global demand high — from oil pricing to trade settlement systems. But the new levers of power are digital, decentralized, and dynamic.
Indeed, the US is working, quite frantically it seems to me, to both grow and gain control of the stablecoin marketplace so as to preserve the dollar’s dominant status. On the one hand, products like Tether’s USDt have worked to sustain demand for US government debt, and thus also the dollar, since the coin was first issued in 2020, with the market’s growth paralleling diminished global demand for the reference assets beneath (again, mostly Treasury bonds). Tether noted recently that, based on 2024 data, the company has become a major source of demand for US Treasuries and, if compared to sovereign nations, “would rank as the seventh largest foreign net buyer of U.S. Treasury securities in 2024, surpassing countries like Canada, Mexico, and Germany.”
It should come as no surprise in this context that US officials and agencies are actively promoting use and consumption of dollar stablecoins and other dollar-linked cryptocurrencies across the American financial system. For example, Executive Order #14178—“Strengthening American Leadership in Digital Financial Technology”—was signed by President Trump in March 2025 specifically to promote and protect “the sovereignty of the United States dollar, including through actions to promote the development and growth of lawful and legitimate dollar-backed stablecoins worldwide”.
Also in March, the US Federal Deposit Insurance Corporation (FDIC) issued new guidance for banks that permits greater involvement with cryptocurrencies and digital assets: “The guidance affirms that FDIC-supervised institutions may engage in permissible activities, including activities involving new and emerging technologies such as crypto-assets and digital assets, provided that they adequately manage the associated risks.”
Then, in May 2025, the US Department of Labor’s Employee Benefits Security Administration rescinded prior guidance issued to 401k pension funds “that directed plan fiduciaries to exercise ‘extreme care’ before adding cryptocurrency to investment menus”. Cryptonomist’s recent analysis indicates the potential magnitude and impact of this change: “the U.S. 401k market involves about 84 million employees, with assets under management totaling approximately 7.3 trillion dollars. According to data collected by financial analysts who are experts in the retirement sector, this integration of cryptocurrencies into 401k plans could transform retirement accumulation strategies for the coming decades.”
[Note: Most US pension funds are already heavily invested in Treasuries, see here for a Fed chart that will blow your socks off.]
In June, Reuters reported that, “The potential for stablecoins to fuel demand for short-term U.S. Treasury securities was a hot topic at a money market fund conference in Boston this week, with investors expecting these digital tokens to absorb a huge supply of government debt later this year…Given expectations of looming Treasury supply of as much as $1 trillion by the end of the year, the market is looking for an incremental buyer that would be a source of new demand for U.S. government debt. Stablecoin issuers fit the bill, market participants said.”
Similarly, MarketWatch interviewed Michael Kelly, global head of multi-asset at Pine Bridge Investments, who expects “one stablecoin from among the many currently being mooted, to emerge as the most liquid and reliable and for this innovation to create demand for U.S. Treasuries and the dollar. He thinks this will prompt a redollarizing of central bank reserves, reversing the recent trend.”
On the other hand, Tether and its competitors (like Circle, which issues the USDC stablecoin) are private companies operating what amounts to an unregulated, offshore market in US government debt that could potentially work at cross-purposes with US needs and interests. Alongside promotional efforts, US President Trump and the US Congress are working in parallel to further regulate and domesticate cryptomarkets, including dollar-backed stablecoins, in an attempt to ensure that the free-wheeling and rapidly-growing global stablecoin marketplace doesn’t operate contrary to US national interests.
With strong support from both sides of the aisle, the GENIUS Act was signed into law in July and provides for greater regulation of cryptocurrencies, including stablecoins. Analysts at NYU’s Law School describe the Act’s provisions as follows:
On July 18, 2025, the President signed the Guiding and Establishing National Innovation for U.S. Stablecoins Act (the GENIUS Act or the Act) into law. The GENIUS Act is the most significant United States law affecting the digital assets industry to date and reflects the Administration’s and Congress’ priorities of establishing a comprehensive framework for the United States’ approach to digital assets and related activities.
The Act is described as a consumer protection bill that establishes Federal safeguards to protect stablecoin holders and enhance consumer confidence in the payment stablecoin market (Steiner et.al. 2025, here).
Important for thinking about systemic risk, the GENIUS Act provides that “permitted payment stablecoin issuers must hold reserves of U.S. dollars or high-quality liquid assets at least equal to the total value of outstanding payment stablecoins (i.e., on at least a 1:1 backing). The reserves must be held in segregated accounts and cannot be commingled with assets of the custodian.”
An especially interesting provision places limits on the types of assets that are eligible to be held in reserve: “reserves are limited to cash, bank deposits and short-term, low-risk securities. Other types of assets such as cryptocurrencies and other securities are prohibited from being used as reserves.” Perhaps this is a measure to protect the financial security of Americans. But I don’t think that is what’s happening here. Rather, it’s a way to ensure continued demand for American government debt.
For its part, Tether celebrated the Act in a June 2025 “attestation report”, noting that they pave the way for more effective collaboration and “alignment” with the US government:
Total exposure to U.S. Treasuries – including $105.5 billion in direct holdings and $21.3 billion owned indirectly – exceeded $127 billion (~$8 billion increase compared to Q1 2025) at the end of Q2 2025, placing Tether among the largest holders of U.S. government debt globally. This milestone comes at a time when U.S. policymakers, through the GENIUS Act, have taken decisive steps to solidify the dollar’s global leadership in digital form. Tether’s reserves composition exemplifies how private innovation can align with public monetary goals, serving as a conduit for secure, on-chain access to U.S. dollar liquidity at scale.
Not so genius
For years, analysts and regulatory bodies have pointed (ironically) to the destabilizing potential of stablecoins. Speaking to the problem of “runs”, which stem from the reality (or perception) that stablecoin issuers do not hold in reserve enough to cover all coins in circulation, analyst Albert Morgan explains: “Unlike decentralized algorithmic stablecoins, there is no blockchain mechanism to algorithmically adjust supply or maintain the peg. Instead, users must trust that Tether Limited has sufficient reserves and will act responsibly as the custodian of those reserves.”
Similarly, Forbes analyst Zennon Kapron noted back in May that, “[T]echnology cannot outrun risk…Stablecoins still face run dynamics: USDC briefly de‑pegged during the 2023 Silicon Valley Bank panic, and the SEC hints large coins might be unregistered money‑market funds.” Researchers at the Federal Reserve discuss this issue at more length:
Tokenized assets with a redemption option might suffer from similar issues as those arising for collateralized stablecoins, such as Tether. Any uncertainty surrounding the tokens’ collateralization levels, especially if accompanied by a lack of disclosures and accurate information about the issuers, might raise investors’ incentives to redeem the reference assets, thus triggering a fire sale of tokenized reference assets (Carapella et. al. 2023, p. 8, here).
There are additional concerns that volatility in the stablecoin market can be transmitted under certain conditions to the markets for the underlying assets, not unlike how trouble in the MBS and CDS markets resulted in a liquidity crisis in the underlying mortgage market back in 2007-8. The fear is that volatility in the stablecoin market, for example if a run occurs, could introduce similar volatility in markets for reference assets such as Treasury bonds:
For example, at sufficient scale a fire-sale of tokenized assets might reverberate through traditional financial markets, as price dislocations in crypto markets provide incentives for market participants to buy the token, redeem it for its reference asset, and sell the latter. Therefore, tokenizations may provide a means for a shock to be transmitted from crypto markets to the market for the reference assets of crypto tokens” (Carapella et. al. 2023, p. 7, here).
In theory, the GENIUS Act should allay some of these concerns. The US Senate Committee on Banking, Housing and Urban Affairs argues that the Act provides solid consumer protections, including monthly public disclosures of reserves and reserve composition, as well as annual audits of financial statements. I have doubts. And not the same doubts as Representative Marjorie Taylor Green (about End Times, the Book of Revelations, and central bank digital currencies) or Senator Elizabeth Warren (about corruption and Trump privately profiting from his public office).
Already, there are signs of risk being amplified and diffused, and unintended consequences taking root. This week, bankers have been lobbying Congress to change language in the Act that they argue will allow stablecoin issuers to unfairly compete with banks, forecasting a US$6.6 trillion “drain from traditional bank deposits”. Who knows what happens to traditional banks as stablecoins pick up speed, but this is a massive estimated outflow that would undoubtedly have serious knock-on effects across the financial system.
Writing for the American Enterprise Institute, Kupiec raises questions about systemic risk, critically noting that the GENIUS Act “sidesteps the issue of payment stablecoin lender of last resort”. Lenders of last resort are entities with deep pockets that step in usually during times of crisis to recapitalize other financial entities. The FDIC, for example, is the lender of last resort for traditional banks and actually had to step in to bail out a stablecoin issuer during the Silicon Valley Bank episode in spring 2023:
To stop bank runs from spreading to other banks, the Treasury was forced to issue a blanket insurance fund guarantee for the failed banks’ depositors which included a large deposit from payment stablecoin issuer Circle. Circle reportedly held $3.3 billion of its $40 billion in payment stable coin reserves as uninsured deposits at SVB bank. Without the FDIC’s deposit insurance blanket guarantee, Circle would likely have lost most if not all of its $3.3 billion uninsured deposit.
The FDIC’s own funds were inadequate to cover all the SVB-related losses that piled up in early 2023 and it ended up having to borrow from the Federal Reserve. Kupiec notes, “There is nothing in the GENIUS Act that prevents this from happening again in the future.”
Finally, as stablecoin markets grow, holders will be exposed to greater levels of risk. Pensioners, bank depositors, young people who are excited to use stablecoins as payment—all of them are indirectly taking on the risk associated with mounting US debts and associated trouble in Treasury markets. Treasuries are not risk-free assets anymore and the growing risks holders entail are being diffused ever-wider as stablecoin circulation grows, and to populations that can ill afford to shoulder more financial risk.
Foreign investors no longer want to buy as much US government debt, so the plan is to ensure that ordinary people like us soak up the surplus. Further, as ordinary people come to indirectly support the Treasury market via dollar stablecoins, they become exposed not only to the risks at play in bond markets but also those at work in stablecoin markets themselves, as well as the amplified risk associated with the interplay between the two (e.g., the “fire-sale” scenario).
I’ll leave off with a bit of recent data from Tether on the many, small USDt accounts they host on their blockchain network, accounts held by lower-income people from around the world, folks of modest means who don’t have access to traditional banking services: “There are 18.7 million wallets that hold more than one cent and less than one dollar of USDT… There are then 31.5 million wallets that hold between $1 and $1,000 of USDT… The prevalence of low-balance wallets is a feature, not a bug, highlighting USDT’s accessibility to users who might otherwise be unbanked.”
It’s a feature, not a bug. Buyers beware.