The GENIUS Act may reportedly trigger a potential worldwide economic disaster, as per the opinions of financial experts.
The U.S. Senate's approval of the GENIUS Act on June 17 marks a significant step towards bringing stablecoins under federal oversight. However, concerns have been raised about the potential risks associated with the Act, which could inadvertently trigger the next global financial crisis.
The GENIUS Act introduces a series of guardrails for stablecoin issuers, including full one-to-one backing of tokens with high-quality liquid assets, quarterly independent audits, and redemption rights for holders. But these measures could have unintended consequences.
One such concern is the Reserve Concentration Risk. The Act mandates that payment stablecoins be backed by high-quality assets such as U.S. Treasuries or top-rated commercial paper. This requirement could concentrate trillions of dollars of stablecoin reserves into a narrow segment of the debt market. Any disruption in this market—like a spike in interest rates or a credit event—could cause a sharp decline in the value of these reserves, triggering widespread financial instability.
Another risk is Fire-Sale Liquidations. In response to market shocks, stablecoin issuers might be forced into rapid liquidation of their concentrated reserves at steep discounts. These distress sales would not only impair stablecoin sponsors but also hurt banks, funds, and other market participants holding the same assets, amplifying financial contagion across markets.
The GENIUS Act's strict audit and redemption rules could also lead to a False Sense of Security for investors, potentially fueling heavier trading volumes and speculative bets. This complacency creates vulnerabilities that could precipitate a digital asset crash with spillover effects.
Furthermore, the Act could create Digital-Run Dynamics. If multiple stablecoins fail simultaneously or lose their peg to the dollar, token holders may rush to redeem their holdings at once, overwhelming blockchain networks and payment systems. This "run" on digital assets could freeze digital markets and impair broader payment infrastructures.
The Act's potential to destabilize the traditional banking system and undermine the U.S. dollar’s dominance in the global payment system are additional concerns raised by financial firms. Since stablecoins operate globally, a crisis starting in the U.S. regulated stablecoin market might rapidly spread internationally, affecting emerging-market banks, fintech firms, and global payment corridors, thereby turning a crypto meltdown into a global financial crisis.
In summary, while the GENIUS Act aims to establish regulatory clarity and stability for stablecoins, its concentration of reserves, potential liquidity stresses, and systemic interconnections between crypto and traditional finance could ironically sow the seeds for a severe global financial crisis. It is crucial for policymakers to carefully consider these risks and develop strategies to mitigate them as they continue to shape the regulatory landscape for stablecoins.
- The GENIUS Act, despite its intention to bring stability to the crypto market, could potentially concentrate large amounts of digital reserves in a specific segment of the debt market, increasing the risk of Fire-Sale Liquidations or Digital-Run Dynamics, which could destabilize the traditional banking system and contribute to a global financial crisis.
- Strict audit and redemption rules in the GENIUS Act might provide a False Sense of Security for investors, leading to increased trading volumes and speculative bets, creating vulnerabilities that could precipitate a digital asset crash with spillover effects on global financial markets.
