The US stablecoin bill is under scrutiny: are tech giants becoming "banks" and is the financial crisis unfolding in "slow motion"?

Source: Wall Street Journal

Written by: Bu Shuqing

Analysis suggests that the bill imposes almost no restrictions on technology giants like Meta, Amazon, and Google issuing their own stablecoins, which could indirectly empower these tech giants to become shadow banks. Given the scale of these tech giants, a severe run on stablecoins could have an impact comparable to the financial crisis of 2008.

U.S. Congress members are vigorously advancing stablecoin regulation legislation; however, this bill is questioned for potentially indirectly empowering tech giants to become shadow banks, even sowing the seeds for a financial crisis comparable to that of 2008.

"Slow Motion Car Crash" - Will Tech Giants Transform into Banks?

The U.S. Senate is advancing a first-ever cryptocurrency bill called the Uniform Standard Stablecoin Safeguards Act (GENIUS) which aims to establish uniform federal standards for the issuance and operation of "payment stablecoins."

The most concerning aspect for the industry is that the GENIUS Act will effectively allow tech giants to enter the banking sector without sufficient regulation.

Hilary Allen, a law professor at an American university who participated in the congressional committee investigating the causes of the 2008 financial crisis, said:

What keeps me awake at night is that this legislation will allow the largest tech platforms to essentially become the equivalent of banks. The last crisis was triggered by financial institutions that were "too big to fail," yet the scale of some tech platforms makes those institutions look small in comparison.

According to reports, the bill imposes almost no restrictions on tech giants like Meta, Amazon, and Google issuing their own stablecoins. Currently, Meta is re-launching its blockchain strategy, exploring the construction of a payment infrastructure based on stablecoins, intending to deeply integrate digital currency into its platform ecosystem.

The risks of stablecoins are strikingly similar to the 2008 financial crisis.

Supporters believe that if stablecoins are backed by 100% cash reserves, there will be no run on them. However, Allen points out that this idea is based on "absurdly optimistic assumptions." She stated, "Money market mutual funds are structurally almost the same," yet they are not immune to the panic that can trigger bank runs.

Money market mutual funds experienced bailouts during the runs in 2008 and 2020, so I believe a stablecoin run is very likely to occur.

In fact, as early as the collapse of Silicon Valley Bank (SVB) in 2023, the U.S. government was forced to intervene to rescue a certain stablecoin — the bank held over $3 billion in USDC reserves as part of its large amount of uninvested deposits. Allen warned:

We may find ourselves in a situation where we essentially have to rescue these large technology platforms.

She referred to the GENIUS Act as a "slow-motion car crash."

Consumer protection regulation is practically non-existent.

Eswar Prasad, a professor of international trade at Cornell University and author of "The Future of Money," pointed out that the bill is lacking in measures for consumer protection and limiting companies from issuing their own stablecoins. He added that:

In addition, the Trump administration's push for cryptocurrency and its light regulatory stance indicate that any such guarantees and restrictions will not be effectively enforced.

Although Democrats initially opposed the bill, partly due to concerns about the influence of the Trump family's cryptocurrency holdings, some Democrats ultimately dropped their opposition. Virginia Senator Mark Warner defended his change of position on Monday, claiming:

Blockchain technology is inevitable; if U.S. lawmakers do not shape it, other countries will.