The Senate Voted to Make Trump Richer and the Financial System Weaker and More Corrupt

Congress may be planting the seeds for the next financial crisis if it passes the GENIUS Act. The act, which is progressing through the Senate, is marketed as regulating a class of cryptocurrencies known as stablecoins – but it is more about creating conditions for cryptocurrencies to penetrate more deeply into the mainstream financial system. The act will help expand the use of stablecoins. This will create an opportunity for the richest stablecoin investors – which now includes Donald Trump – to earn much more money: US dollars, not crypto dollars.

What are stablecoins? Stablecoins allow one to have a cryptocurrency that is supposed to hold its value instead of fluctuating wildly like most cryptocurrencies. This would encourage the use of the stablecoins in day-to-day financial transactions. A stablecoin could, for example, be pegged to the US dollar, and its value would always be worth the same amount of dollars.

Here is something else that is always worth the same amount in US dollars: the US dollar. Cryptocurrencies remain a solution in search of a problem. As economistPaul Krugman repeatedly pointed out, there isn’t much that one can do with cryptocurrencies that can’t be done more cheaply and easily with something else.

A crypto industry media outlet stated the promise of stablecoins: “Think about your digital wallet working just like a debit card — except it holds stablecoins. . . . That’s not a far-off fantasy anymore. We’re getting closer to a point where paying with a stablecoin could feel just as normal as swiping a Visa.” Another thing that works just like a debit card: a debit card. And using one’s debit card for payments isprobably faster and less polluting to the environment.

So, given the superiority of actual dollars and debit cards, what is the upside of stablecoins? Well, if one is a criminal, using stablecoins allows one to obscure one’s identity and more profitably use crypto for illegal financial transactions. The cybercurrency-tracing firm Chainalysis found that “stablecoins were used in fully 70 percent of crypto scam transactions in 2023, 83 percent of crypto payments to sanctioned countries like Iran and Russia, and 84 percent of crypto payments to specifically sanctioned individuals and companies.” The United Nations reportsthat the Tether stablecoin is the “preferred choice for regional cyberfraud operations and money launderers alike due to its stability and the ease, anonymity, and low fees of its transactions.” As Erin West, a deputy district attorney for California’s Santa Clara County, put it, “These scammers can’t risk the volatility of any of the other coins like bitcoin or ether. All they want is to move assets from the victims’ hands to their own in the cheapest, easiest way possible.” Stablecoins provides a solution that criminals need.

Senator Elizabeth Warren gave five good reasons Senators should not support the GENIUS Act: (1) it enables corruption, particularly for Donald Trump; (2) it increases risk to US financial stability; (3) it provides easier access to money for terrorists and drug cartels; (4) it will allow Elon Musk, Mark Zuckerberg, and other billionaires to issue their own money, collect even more of our financial data, and ultimately destroy small, community banks; and (5) it will put average investors at greater risk to scammers.

All of Senator Warren’s points deserve attention, but the risk to the US financial system could do the most widespread damage. Senator Warren argues that the Commodity Futures Modernization Act allowed the once obscure financial derivatives market to massively expand into the core of the financial system. She links it to the 2008 financial crash in which “10 million people lost their homes and millions more people lost their jobs and their savings.” She adds:

A financial meltdown triggered by crypto instability is not some alarmist fever dream. In fact, it nearly happened just a few years ago. Crypto markets abruptly lost $2 trillion, that’s trillion with a “T,” after the collapse of several major crypto firms in 2022. Two of the largest stablecoins failed to maintain their pegs. Now luckily these cryptocurrency markets were mostly separate from the rest of the financial system, so we avoided the mass economic destruction. That ends today if we enact this bill. The GENIUS Act folds stable coins directly into the traditional financial system while applying weaker safeguards than banks or investment companies must adhere to. Make no mistake, we are likely to see another financial crisis in the coming years, and we are virtually certain to see another set of wild swings in cryptocurrency values. And it will be the American people who will bear the cost of a massive financial crash facilitated by the stablecoin market, if Congress passes the GENIUS Act.

Will Congress listen to Warren – or to the more than $130 million the crypto industry spent in the 2024 election?

This first appeared on CERP.

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