Dem
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GOP
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Fundamentally all crypto is a scam, a Ponzi scheme. A buyer of any crypto coin has to hope that more people will want it later and the price will go up. The only "problem" it solves is how to get paid in an untraceable way, something criminals collecting ransom care about a lot, but that isn't so important in most other situations. Very few merchants accept crypto as payment for goods, and it offers no advantages over cash, credit cards, debit cards, PayPal, Venmo, Zelle, and other electronic payment methods. For payment, in some ways crypto coins are worse than other payment methods due to transaction fees or gas fees that consumers don't pay with other schemes (although merchants often do).
Unlike, say, stock, real estate, and other investments, there is no direct return on the investment in terms of dividends, rent, etc. It is purely speculation that people will continue to want the crypto in the future, despite it having no inherent value. Gold also doesn't pay dividends or rent, but it has many commercial uses from electronics to dentistry (which means it has some inherent value) and has been around as a store of value for over 2,500 years. It is also heavy and difficult to steal.
One the claimed attractions of crypto coins is that payments can happen instantly and for free (except for those nasty "transaction fees" in some cases). This is because the U.S. banking system is archaic. Wire transfers in the U.S. take about 10-20 minutes to complete, but banks often charge $15-25 dollars per wire. Within the 20-country eurozone, wire transfers are the main way of paying all bills. Checks were abolished in 2002 as inefficient and obsolete. Now, to pay a bill you go to your computer, log into your bank, enter the IBAN (International Bank Account Number) of the payee and the amount and the transfer is completed in 5 seconds and is free. What does crypto have to offer that beats this (other than secrecy for criminal activities)? But even in the U.S., many instantaneous electronic payment systems exist.
The value of a crypto coin can be extremely volatile. On Nov. 12, 2021, one bitcoin was selling for $65,006. A year later, on Nov. 10, 2022, it was worth $15,742. Now it is almost $120,000, but if speculators lose faith in it for some reason, it could be worthless tomorrow.
One attempt to rein in this volatility is the use of stablecoins. A stablecoin is pegged to some external store of value. However, in tough times it can be depegged. For example, a tether coin is supposed to always be worth $1. The issuing company says it has a reserve fund equal to the total value of the coins in circulation, so it is always possible to trade in a coin for the cash equivalent, eliminating all risk (which also eliminates the possibility to profit from gains in the value, so what is it good for)? In reality, the reserve often is not equal to the value of the coins in circulation. Tether, for example, was fined $41 million for deceiving customers during 2016-2018, when it had enough reserves only a quarter of the time. Some stable coins use other currencies, gold, oil, real estate, or even other crypto coins as their reserves, which exposes coin owners to risks if too many of them want to cash in at the same time due to some bad news and there aren't enough reserves to pay everyone.
Could that happen to a stablecoin? In the immortal words of Sarah Palin, You betcha! In May 2022, terra, a stable coin, was the third-largest crypto coin (after bitcoin and ethereum) by value in circulation. In the space of 5 days, terra went from $1.00 to 13 cents. Within 2 weeks the total value of all the terra coins went from $60 billion to $0, despite it being a stable coin. The meltdown happened because the underlying reserves were in another crypto coin that crashed and burned. People who held onto their terra coins lost everything, despite it being pitched as a stable coin.
Crypto-like assets have been around for a while. In 17th century Holland there was tulip mania when a single tulip bulb was worth more than what a skilled craftsman earned in a year, until it was suddenly worth nothing.
So, does crypto sound kind of scammy to you? Well, cue the scam-master. On Friday, Donald Trump signed the GENIUS
Act, which sets guidelines for trading stablecoins. Did the
$200 million
the crypto industry plowed into political campaigns in 2024 influence any votes? Beats us. But we know the crypto
industry spent more on campaign donations in 2024 than the oil, tech, pharmaceutical and every other industry. Payday!
Needless to say, Trump, who in 2021 called crypto a scam, is now enthusiastic about the "industry." After all, his sons
run the World Liberty Financial company, which issues a stablecoin, and he himself has the $TRUMP coin. Getting
rubes small investors to pay real money to buy, er... nothing, seems to run in the family.
Now onto the GENIUS Act. Here is the text if you want to know all the details. It establishes rules for who may issue a stable coin, who may audit them, and who may take action against issuers if needed. There are also rules about commingling and who can commingle and how. It also authorizes the National Institute of Standards and Technology to establish standards so people can exchange one stable coin for a different one.
Sec. 11 is interesting—if your interests run to endogenously collateralized stablecoins. It orders the secretary of the treasury to determine what can be in the reserve fund. This is a real sleeper. Can the promoter of a stable coin deposit his grandma's old artwork in the reserve fund and say it is worth $10 million, even if she is not Grandma Moses?
The touchy subject of "insolvency" is also briefly mentioned. Sen. Bill Hagerty (R-TN), who wrote the bill, may have heard about terra. Hagerty cofounded a private equity firm before running for the Senate, so he does know something about finance. If the actual Act is incomprehensible to you, but you still want to know more about it, here is a slightly more comprehensible explanation.
It is expected that banks and other companies like Amazon and Walmart, will now issue their own stable coins and millions of people will jump on the bandwagon. As is always the case with new products, there will be many competing coins initially. There could easily be thousands of different coins before long.
Some of the smaller companies backing them will fail simply due to competition. Will coin holders lose their investments? If terra (and tether) are a guide, probably many will as many companies are sure to be "creative" about what is in their reserves, no matter what the treasury secretary reports back. There will also be consolidation. That always happens, with bigger companies gobbling up smaller ones. It will be a cutthroat business. Since no government agency will guarantee any coins, there will invariably someday be some bad news (e.g., stable coin X is in trouble) and that will start a "bank run," like in the 1930s. The coin will collapse, leading people to start worrying about the stability of other coins. Given the speed of trading and the lack of any circuit breakers, the entire industry could collapse within 24 hours.
Another issue is that coins are held in wallets in exchanges. They can be hacked. In Feb. 2025, the second-largest crypto exchange, Bybit, was hacked. The hackers emptied all the wallets and moved all the coins elsewhere. It is believed that the hackers were working for the North Korean government. They made out like bandits. The losses were about $1.5 billion. Is hacking still a thing? Yup. Just this morning it was reported that tens of thousands of Microsoft servers have been hacked worldwide, and Microsoft is vastly more technologically competent and security conscious than the folks who run crypto exchanges.
A hack on a major crypto exchange could be the trigger to start a bank run on stable coins, when millions of people want to get out fast and the reserves can't cover the withdrawals, even if there is theoretically value there. For example, if a stable coin is covered by actual, valuable real estate, it could fail when the issuer cannot pay buyers trying to redeem their stable coins because real estate cannot be sold on a dime. As companies compete for business, many will try to gain a competitive edge by using increasingly iffy assets in the reserve. Somali shillings, anyone? Pork bellies? Guest tickets to dinner with Donald Trump? Boy, those are worth a lot.
It is also possible that bugs in the crypto software, defects in the complex math used to maintain the blockchains (which keep track of transactions), or malafide players maintaining the blockchains, could also cause catastrophic failures. In the short run, the GENIUS Act will give the crypto industry a giant boost and many people will make a lot of money for a while. But it is entirely possible that some unforeseen event in the future will cause sudden bank runs and bring the entire worldwide financial system down, starting a worldwide depression or worse. Future historians may well mark Friday as the day the risk of this shot up enormously, similar to June 17, 1930, the date Herbert Hoover signed the Hawley-Smoot Tariff Act.
Interestingly, the GENIUS Act bans members of Congress and their families from issuing stable coins, but the Act specifically exempts the president and his family from the ban. Cabinet and other high officials are also exempt. One analysis shows that 20% of high-level administration officials own some crypto.
The possibilities for corruption opened by the Act are legion. For example, in March, World Liberty Financial issued a stablecoin USD1. Earlier this month, an investment firm in Abu Dhabi used it to make a $2 billion investment in the crypto exchange Binance, putting WLF in a position to profit handsomely off the transaction. The Constitution's emoluments clause is now officially dead. (V)