The Atlantic Monthly: How will Crypto Assets trigger the next financial crisis?

Source: Don't Understand Classics

Bitcoin fell below $90,000 today, almost completely reversing this year's gains. Unbeknownst to us, the cryptocurrency market has evaporated more than $1 trillion over the past six weeks.

Data provider CoinGecko tracks over 18,000 tokens, and since reaching a market peak on October 6, the total market capitalization of these tokens has dropped by 25%, equivalent to about $1.2 trillion disappearing.

Analysts have pointed out that “despite the adoption by institutions and positive regulatory momentum, the gains in the cryptocurrency market have now returned to zero this year.” The Financial Times believes the main reason is market concerns over the high valuations of tech stocks, coupled with uncertain trends in U.S. interest rates, which have triggered a sell-off of speculative assets.

Amidst the chaos, The Atlantic jumped on the bandwagon and published an in-depth commentary: “How Cryptocurrency Could Trigger the Next Financial Crisis.” However, the article does not discuss Bitcoin, altcoins, or Web3, but rather what many consider to be the most “stable” and “secure”—stablecoins.

Why are so-called “stable” coins actually the most dangerous?

The author believes that the risk of stablecoins lies not in their “instability” but in their disguise of being “too stable.”

On the surface, stablecoins are the “anchor” of the cryptocurrency world – they are pegged to the US dollar, facilitating circulation and serving as a “bridge” for the entire market. Whether you are trading coins, doing contracts, or arbitraging, you are almost always reliant on them.

But it is precisely this seemingly “safe” design that could make it the next flashpoint. Especially after the passage of the “GENIUS Stablecoin Act” pushed through by the Trump administration, which will officially take effect in 2027, stablecoins have not only escaped effective regulation but have also received implicit official endorsement, allowing for faster expansion and the absorption of more funds without bearing the prudential regulation, capital requirements, and deposit insurance that the banking system faces.

Once market confidence collapses, issuers may be unable to redeem on time, and a digital version of a “bank run” could occur on the blockchain in milliseconds. At that time, the entire U.S. Treasury market and even the global financial system may be shaken by what appears to be the “safest” bomb.

The author points out that it is not an ordinary technological bubble, but rather a risk factor that may have deep links with sovereign currencies, the bond market, and the Federal Reserve's interest rate operations. The United States may be repeating the mistakes of the 2008 subprime mortgage crisis, except this time, the danger is not home loans, but “on-chain dollars.”

The following is the original content:

On July 18, 2025, President Donald Trump signed a rather self-congratulatory law: the “National Stablecoin Innovation and Guidance Act” (GENIUS Act).

If this bill is destined to disrupt the financial system as it seems now, then the name “genius” will become an irony: who would think it is a good idea to let the cryptocurrency industry set its own rules?

The bill, officially titled “Guiding and Establishing National Innovation for U.S. Stablecoins Act,” aims to establish a regulatory framework for a type of cryptocurrency known as stablecoin.

Despite the name sounding reassuring, stablecoins — those cryptocurrencies that promise to maintain their value stable against fiat currencies in the real world (typically the US dollar) — are currently the most dangerous form of cryptocurrency. Its danger comes from the fact that it “seems very safe.”

Most people know that cryptocurrencies are highly volatile and speculative. The value of well-known cryptocurrencies like Bitcoin and Ether fluctuates dramatically every day and every year. The original intention of stablecoins was to eliminate this volatility, but they may pose a greater threat to the broader financial system.

The GENIUS Act (similar to the EU's Markets in Crypto-Assets Regulation passed in 2023) provides certain safeguards, but these measures may greatly expand the stablecoin market instead. If—or rather when—these stablecoins collapse, the GENIUS Act virtually ensures that the U.S. government will have to provide hundreds of billions of dollars in bailouts to stablecoin issuers and holders.

We always hear a saying: “This time is different.” In the financial field, this is often a harbinger of disaster. In the early 2000s, the financial sector claimed to have invented a “risk-free asset” by packaging subprime mortgages into bonds (many of which were even rated as AAA).

But risks always come with a price. Disguising high-risk assets as low-risk assets will only allow speculators to reap the profits, shifting the consequences onto others. In 2007, these “AAA” rated subprime bonds collapsed, plunging the world into the worst economic recession since the Great Depression. Stablecoins are similarly engaging in this kind of “alchemy”—turning trash into gold—and may bring about the same outcome.

The stablecoin you purchased today for 100 dollars should theoretically remain equivalent to 100 dollars in the future. This design makes it appear to be a reliable way to store digital assets. Stablecoins are created to provide safety and liquidity similar to bank deposits within the cryptocurrency system.

However, these “stable” commitments are often unreliable. In the 11 years since the birth of stablecoins, multiple issuers have defaulted, resulting in losses of billions of dollars.

Terra was once one of the top issuers of stablecoins, but it evaporated nearly $60 billion in assets during a crash in May 2022. As Nobel laureate Jean Tirole said, “Stablecoins, like Money Market Funds, may seem safe, but can collapse under pressure.”

The GENIUS Act is set to officially take effect in January 2027, and its regulatory intent is to attract investors by reducing risks and enhancing stability. However, the issue is that these “guardrails” are more about protecting the profits of issuers and do not effectively reduce the risks to consumers and taxpayers. The result may be that when stablecoins face a crisis again in the future, the impact will be greater, and the damage to the real economy will be more severe.

Stablecoin advocates argue that this type of cryptocurrency offers more advanced technology for storing and transferring funds. Bank transfers often take a long time, and international remittances are costly and cumbersome. Stablecoins seem to enable large cross-border transfers as easily as paying a babysitter with Venmo.

This commitment is not real. For legitimate transactions, cryptocurrencies are still very susceptible to scams, hacking, and theft. According to a report by blockchain analysis firm Chainalysis, nearly $3 billion in cryptocurrencies were stolen in the first half of 2025.

In 2024, the CEO of a pharmaceutical company in Texas mistakenly sent approximately $1 million worth of stablecoins to a stranger's account due to a typo in the address, and the recipient refused to return the funds. The stablecoin issuer, Circle, has also stated that it is not responsible for this situation, and the company has now filed a lawsuit against Circle.

In fact, most cryptocurrency holders do not use it for consumption. A 2023 survey by the Federal Deposit Insurance Corporation (FDIC) found that only 3.3% of cryptocurrency holders use it for payments, and only about 2% use it to purchase actual goods.

The real advantage of stablecoins is that they allow asset holders to use the US dollar system while avoiding US regulation. Currently, about 99% of stablecoins are pegged to the US dollar.

The GENIUS Act claims to require stablecoin issuers to adhere to anti-money laundering laws such as “Know Your Customer” (KYC), but only at the time of the coin's initial issuance in the U.S. After that, how it is transferred, to whom, and its flow is essentially untraceable.

For example, Tether plans to launch a new stablecoin not aimed at customers in the United States or the European Union, thus completely bypassing KYC regulations.

At the same time, decentralized exchanges allow people to exchange stablecoins without any regulation, making it very easy for originally unregulated coins to enter the U.S. market. Although the GENIUS Act requires reporting of suspicious transactions, most of the stablecoin ecosystem is outside the U.S., making it very difficult to enforce this regulation.

Due to these inherent risks, the stablecoin market size has historically been small, currently ranging between 280 billion and 315 billion USD, roughly equivalent to the size of the 12th largest bank in the United States. Even if the entire stablecoin market were to collapse tomorrow, the U.S. financial system may be impacted but would still be able to recover.

However, Citigroup predicts that if the GENIUS Act comes into effect, the stablecoin market could expand to $4 trillion by 2030. A default of this magnitude could cause serious disruptions to the global financial system.

Functionally, stablecoin issuers are essentially “institutions that accept deposits.” They collect cash and promise to redeem it at any time. Banks have deposit insurance, quarterly inspections, and annual audits. However, the GENIUS Act abandons these regulatory measures, requiring annual audits only for large issuers with assets exceeding $50 billion.

The GENIUS Act claims to eliminate default risk by requiring issuers to back their issuance with “liquid assets such as US dollars or short-term government bonds” and to publicly disclose the reserve composition monthly. It sounds very reliable. However, putting cash into short-term assets with maturity of only a few hours or days yields extremely low returns.

Cryptocurrency companies have spent tens of millions of dollars on lobbying and political donations to promote this bill, and have provided substantial support to President Trump's campaign. They are clearly not here just to “make a little interest.”

The GENIUS Act allows the use of treasury bonds with a maximum term of 93 days. These bonds typically have an annual yield of around 4%, but there is also interest rate risk: when interest rates rise, the value of the bonds declines. For example, in the summer of 2022, the 3-month treasury bond yield rose from less than 0.1% to 5.4%. If the issuer sells off midway, it could incur losses.

If you are a stablecoin holder, you may be concerned that the issuer holds bonds whose value is depreciating. If the demand for redemptions increases, the issuer may manage the first few redemptions, but ultimately they will run out of funds. Once panic hits the market, everyone will rush to withdraw, triggering a “bank run” in the digital age.

Even if traditional banks experience a shrinkage in their on-paper assets, customers need not worry because there is federal deposit insurance. However, stablecoin issuers have no insurance at all, relying solely on the assets they hold—these assets fluctuate every minute. Once the market perceives risk, it will be too late.

Proponents of the GENIUS Act believe that it mandates asset diversification, such as requiring a portion to be held in cash, overnight assets, 30-day assets, etc. It also does require disclosures. However, this disclosure information is severely lagging and cannot keep up with the reality of funds flowing “by the second.” An issuer that appears sound in a monthly report may be insolvent a week later.

This combination of information lag, loose regulation, and lack of insurance is a perfect recipe for panic and “bank runs.” Once more people start using stablecoins to store dollar assets, even a slight disturbance could trigger a systemic crisis. To meet redemptions, issuers will have to sell government bonds, which in turn will drag down the entire bond market—raising interest rates and hurting everyone.

Taking Tether, headquartered in El Salvador, as an example, its holdings of U.S. Treasury bonds currently amount to $135 billion, making it the 17th largest holder of U.S. debt globally, just behind Germany. In May 2022, Tether faced market skepticism regarding the authenticity of its reserves, resulting in $10 billion being redeemed within two weeks. If a collapse had occurred at that time, the government could have remained uninvolved. However, as its scale grows, the risks can no longer be ignored.

The GENIUS Act prohibits certain high-risk assets, but it cannot change the fundamental issue: the profits from stablecoins come from risk. Tether CEO Paolo Ardoino announced in September that the company is considering financing, with a valuation that could reach $500 billion.

This kind of regulatory vacuum, which allows for “enjoying government assistance without paying insurance premiums,” is precisely the root cause of the 2008 money market fund crisis. That year, the federal government intervened, safeguarding $2.7 trillion in uninsured assets.

Supporters believe that cryptocurrency is the currency of the future, while critics call it a scam that serves crime. Warren Buffett once said, “Bitcoin is probably rat poison squared.”

Currently, these controversies have little to do with most people. For example, at the end of 2022, the exchange FTX went bankrupt, which had almost no impact on the average economy. However, stablecoins are different; they were designed to be deeply tied to the real financial system.

The GENIUS Act aims to make it a new buyer of US debt. The White House even stated in a briefing: “The GENIUS Act will increase demand for US Treasuries and strengthen the dollar's status as the world's reserve currency.”

The question is: Who will generate this demand? One of the answers is criminals. The global scale of “dirty money” is estimated to reach $36 trillion, accounting for 10% of global wealth. Stablecoins provide a channel for laundering it.

In 2023, Binance paid over $4 billion in fines to the U.S. Department of the Treasury for allegedly facilitating transactions for terrorist organizations. In October 2025, President Trump pardoned the founder of Binance, and reports indicated that Binance would collaborate with the Trump family's cryptocurrency project.

Why was the GENIUS Act able to pass Congress so easily? The voting results in the House and Senate were 68:30 and 308:122, respectively.

Supporters are good at lobbying, beneficiaries are active, and victims are indifferent. Traditional banks once thought they were unaffected because the legislation prohibits stablecoin issuers from paying interest. However, the stablecoin industry is working hard to circumvent this restriction. Nowadays, Goldman Sachs, Deutsche Bank, Bank of America, and others are considering jointly launching their own stablecoin.

Opponents in Congress, such as Senator Elizabeth Warren, are concerned about the Trump family's massive crypto profits. She is not wrong. According to the Financial Times, the Trump family earned over $1 billion in pre-tax profits from the crypto industry in the past year. One outcome was the Department of Justice's announcement in April to significantly scale back investigations into crypto fraud.

Although this kind of corruption is disgusting, it is not a systemic risk. The real danger is that stablecoin issuers want to attract deposits significantly without having repayment capability guarantees.

History has proven: the U.S. government is unlikely to sit idly by while large stablecoins default, yet the GENIUS Act does not provide the government with the tools to prevent such a crisis.

The bill has not yet come into effect, and there is still time to cut losses.

We can consider stablecoin issuers as financial institutions that absorb deposits, requiring them to pay insurance premiums for USD stablecoins, accept event-driven disclosures, and establish headquarters in the United States and pay taxes. At the same time, the current high-cost cross-border remittance system should be reformed to weaken the false advantages of “fast transfers” in the crypto industry.

After the financial crisis of 2008, investor Jeremy Grantham was asked, “What have we learned from this crisis?” He replied, “We've learned a lot in the short term, a little in the medium term, and nothing in the long term.”

Today, stablecoins are reminding us that the crisis has become so distant that it is almost forgotten, with a risk structure similar to that of subprime securities.

In a free country, the government will not stop you from speculating. But danger only arises when speculators use other people's money to speculate - this is the essence of stablecoins, and the GENIUS Act is fostering this trend.

If there is no intervention, the next financial disaster in the United States is just a matter of time. [懂]