European Studies Director and Jean Monnet Chair, Professor Mark Copelovitch, shares his analysis in Barron’s of the potential consequences of the newly introduced Genius Act for the financial industry. While the legislation aims to fill a regulatory gap in the cryptocurrency sector by introducing rules for stablecoins, Professor Copelovitch warns that it may foster a dangerous illusion of safety, one that could ultimately spark a crisis at the core of the banking system.
Professor Copelovitch is “deeply skeptical about stablecoins’ effects on financial stability, as well as their viability as an alternative to fiat currencies (like the U.S. Dollar).” He argues that stablecoins may not be as safe as they appear especially if banks, emboldened by the new rules requiring stablecoins to be backed by U.S. Treasury or other low-risk assets, begin taking excessive risks under the assumption of safety.
He reminds readers that despite increased regulation, stablecoins are not inherently more stable than other crypto assets. The entire sector remains subject to volatility, speculation, and illicit financial activity. If banks and investors speculate on inherently risky digital assets, the result could be heightened systemic risk and a greater likelihood of a future financial crisis.
Nevertheless, Professor Copelovitch notes that the rise of stablecoins will likely reinforce U.S. dollar dominance. As he puts it: “The math is simple: If stablecoins must be backed by dollar-denominated assets, and they grow exponentially in the years ahead, then demand for the dollar will also massively increase.” Because of the unique role of the U.S. Federal Reserve, this dynamic is unlikely to change even amid growing financial instability.