Eric Sepanek
SBC Founder
Eric Sepanek is the founder of Scottsdale Bullion & Coin, established in 2011. With extensive experience in the precious metals industry, he is dedicated to educating Americans on the wealth preservation power of gold and silver.
As the crypto-friendly administration champions expedited stablecoin legislation, experts across sectors warn the GENIUS and STABLE Acts raise the spectre of a crippling bank run. Although the bills seek to legitimize stablecoins and support dollar strength, critics point to inherent weaknesses, crypto’s checkered history, and limited safeguards as injecting risk into an already vulnerable financial system.
Wait, what are stablecoins?
In the crypto-sphere, stablecoins refer to digital tokens designed to offer steady price action in a sea of volatility. These coins are usually backed by conventional assets such as USD, cash equivalents, or short-term US Treasuries. Although these traditional instruments are the focus of stablecoins, investors shouldn’t overlook the riskier assets, such as corporate debt and Bitcoin, often lurking in the background. For example, Tether, which accounts for roughly 70% of the stablecoin market, has come under scrutiny for failing to back up its claim that all its digital tokens are backed by USD.
The Legislation in Question
Right now, two separate, stablecoin-focused bills are on a fast track to approval with an aligned Congress and Executive Branch:
- GENIUS Act: Seeks to require stablecoin issuers to back tokens 1:1 with secure, liquid, and safe assets such as cash and Treasuries.
- STABLE Act: Aims to reduce risk to consumers and the financial system by regulating stablecoins as insured instruments.
The Risk of a Bank Run
The US still feels the tremors of the most recent small bank collapse in its economic bones as watchdogs, government officials, and independent investors ring the alarm bells over the integration of stablecoins into the economy.
Experts see the potential for a digital-era bank run on these so-called “stable” tokens, where issuers might be forced to rapidly sell reserve assets, fueling broader market disruption.
Here are some of the core weaknesses of this legislation and stablecoins in general:
● Weak Reserve Standards: Digital tokens may rapidly lose value or face selling challenges in the midst of a crisis if reserves include riskier assets such as Bitcoin or corporate debt.
● Lack of Insurance: Without requiring issuers to hold stablecoin reserves in insured banks, even a relatively small failure could trigger a domino effect of closures as confidence wanes.
● False Sense of Security: Treating stablecoins as stable, liquid, and secure as cash covers up their fragility, which increases the chances of a run when the public recognizes these inherent risks.
● Rapid Expansion: Stablecoins have exploded in value over 2024, growing by 90% within a year. The larger the market, the bigger the fallout of a bank run.
● Limited Scope of Legislation: Experts highlight how US legislation falls short of EU rules by keeping key vulnerabilities in place, like reliance on “safe” assets, which could freeze under stress.
👉 Related Read: Is Bitcoin a Good Investment?
Taxpayers at Risk…Again
The concept of “too big to fail” might be associated closely with the Global Financial Crisis of 2008, but it’s a financial tale as old as time. Since the 1980s, the taxpayers have been on the hook for more than a trillion dollars due to financial mismanagement and outright fraud by private and public institutions. Some of the most notable and expensive examples include:
- 1980s Savings & Loan Crisis
Cost: ~$132 billion
Cause: Deregulation, risky lending, and mismanagement by Savings & Loan institutions - 2008–2010 Global Financial Crisis (GFC)
Cost: $700+ billion (TARP, AIG, Fannie/Freddie, Bear Stearns)
Cause: Subprime mortgage collapse, overleveraged banks, systemic risk in housing finance, and derivatives - 2020 COVID Financial Rescue
Cost: $500+ billion backstopped via Fed and Treasury facilities
Cause: Market liquidity crisis due to pandemic shutdowns; need to stabilize corporate credit and financial markets - 2023–2024 Regional Bank Failures
Cost: ~$20 billion (FDIC insurance fund, may rise)
Cause: Interest rate risk mismanagement, concentrated depositor bases (esp. tech sector), panic withdrawals
Given the history of stablecoins and crypto in general, critics fear this legislation will eventually become another bullet point in the long list of financial bailouts at the expense of the American public.