Trump's crypto deregulation poses systemic risk to global markets
The US has embedded uninsured stablecoins into its core banking system, a regulatory overhaul that economists warn poses a direct systemic threat to the global economy.
Washington has fundamentally rewired its financial architecture. Following aggressive lobbying and $1.2bn in direct personal earnings for Donald Trump from the cryptocurrency sector, the US Congress passed the Genius Act with bipartisan support. The law allows banks, non-banks and retailers like Walmart to issue their own stablecoins, effectively plugging the crypto industry into the formal banking system where everyday savings are held.
Stablecoins are digital tokens pegged at $1, currently used almost exclusively to trade riskier assets like bitcoin. Unlike traditional bank accounts, these holdings are not insured by the FDIC. Issuers promise to guarantee their value by backing them with safe assets like US treasury bills, pitching the technology as a way to execute cheaper, real-time international transfers.
Major financial institutions are already moving to capture this new market. As of early June, 233 stablecoins were in circulation. Mastercard is buying crypto businesses and accepting stablecoin settlements, while JPMorgan and Citi are building their own crypto deposit infrastructure to fend off upstarts.
This integration follows a systematic dismantling of US financial oversight. Trump shut down the Securities and Exchange Commission’s crypto-enforcement programme, gutted its oversight unit and directed the Department of Justice to pull back money laundering investigations. He is now pushing the Clarity Act to provide light-touch regulation for the broader crypto market.
For Europe and the wider global economy, the danger lies in how these private currencies interact with sovereign debt. Stablecoins will inevitably draw capital away from commercial banks, potentially reducing lending to the real economy while artificially boosting demand for US treasuries.
Economists are sounding the alarm over the lack of systemic safeguards. “Some policymakers may view stablecoins as an up-and-coming financial innovation that does not currently pose any systemic risk and therefore believe that the best strategy is to wait to see how things play out,” wrote Yale’s Gary Gorton and Jeffery Zhang from the University of Michigan. “That would be a terrible mistake.”
Because the system is opaque and lacks a lender of last resort, issuers may be tempted to abandon safe assets for higher-yielding investments to maintain their $1 peg. As Rutgers economist Michael Bordo noted: “There are always new entities that are going to figure out a way to be outside the regulatory net.” This invites the stablecoin equivalent of a bank run.
A mass panic could have severe transatlantic consequences. “If panicked customers force [issuers of stablecoin] to sell, treasury prices could collapse, sharply increasing interest rates and destabilizing other financial markets and our entire economy,” warned Barry Eichengreen from the University of California, Berkeley. A crash in US treasury prices would immediately ripple through European banks and pension funds heavily exposed to American debt.
