By Richard Murphy, Professor of Accounting Practice at Sheffield University Management School and a director of the Corporate Accountability Network. Originally published at Funding the Future
Stablecoins are being sold as safe, secure cryptocurrencies. In reality, they are shadow banking in disguise – with the same risks that nearly destroyed the global economy in 2008. Nobel Prize–winning economist Jean Tirole is worried, and so am I. If these private tokens collapse, the public will pick up the bill. It’s time to call stablecoins what they are: a threat to financial stability and democracy.
Stablecoins could crash our economy.
Now, admittedly, they will probably crash the US economy before they crash the UK economy, but once one economy crashes, most follow on. And stablecoins are a fundamental threat to our financial stability at present.
Let’s be clear what stablecoins are. They are simply a form of cryptocurrency that are supposedly asset-backed. In other words, if you buy a stablecoin, and $280 billion has been invested in these things at this moment, then you buy an asset that is supposedly backed by US government bonds, and therefore, they are secure.
The emptiness of Bitcoin and other cryptocurrencies is avoided, supposedly, as a consequence, but as Nobel Prize-winning economist Jean Tirole said recently, he is very, very worried by stablecoins. And he’s right to be so, because although people talk about them as if they are money, they are not.
They carry no guarantee from any government. And worse still, they’re not subject to any real supervision.
The danger is simple. When they collapse, and they may well do so, taxpayers are very likely to be forced to pick up the bill.
Tirole issued his warning in an interview with the Financial Times when he said that there is insufficient supervision of stablecoins. It’s a point I’ve made on this channel before now, and I’m glad to see somebody like him joining in, because what he’s saying is that the whole multi-billion-dollar stablecoin market is at risk of failing, and that could create a future financial crisis, and I really do not think he is over-egging his claim.
If depositors, whether retail or institutional, believe that they’re holding safe deposits, and that is the impression that they are given, then, when everything goes wrong, they will demand a government rescue. And governments fearing contagion and public anger will, at that time, probably have no choice but to intervene.
Now, what are the parallels?
Stablecoin recreates the dangers of shadow banking that we saw before the 2008 financial crash.
They pretend to be fully backed assets, just as the bonds that were marketed at that time claimed to be. But the risk is that the US Treasury bonds, that stablecoin funds are supposedly invested in, provide too low a yield in real terms to provide the backing for those who promote these funds, and they will therefore abandon this form of asset backing and instead go for riskier assets with higher returns. At that point, the very idea of stability, which is implicit in the name stablecoin, will disappear, and one shock could collapse the whole system.
I’m already aware of the risk to US financial markets from the overvaluation of tech companies as a consequence of AI. The S&P 500 is massively overvalued, as is the FTSE 100 in the UK. But stablecoins exaggerate this risk and elevate it to a different plane.
And that’s particularly the case because of the political involvement in stablecoins. Let’s be clear. The US administration from Donald Trump onwards is heavily invested in stablecoins. In fact, in many cases, much of their personal wealth will be dependent upon the success of the stablecoin market.
As a consequence, they are likely to understate the need for effective regulation. Weak regulation is already a problem, but it’s going to get worse with cronyism, corruption and inevitable disaster, potentially following.
And the scale of the problem is big. I’ve already mentioned $280 billion is now held in so-called stablecoins, and that’s not trivial. It is a systemically significant sum equivalent to the size of a major bank failure. And when we know that major bank failures were the cause of the 2008 financial crisis, the world could not afford Lehman to go, as happened, then we can see that this is something that could unravel and could unravel fast, creating the pressure for a taxpayer-funded bailout.
Stablecoins, however, do something even worse than bank failures did. They actually link themselves to the US dollar. But at the same time, they are not dollars. They are not money, but they undermine, by the way in which they’re issued, the ability of the government and central banks to control money.
Effectively, they’re creating a parallel private currency, and they shift control over money creation to private speculators and crypto-oligarchs as a consequence. That means democratic states could lose the ability to run their own economic policies.
And when we look at who is behind these currencies, we might believe that this is deliberate because, remember, the far-right and some crypto enthusiasts in the USA are closely related. And the far-right has no love for the US state or the state in any other country , or the power that it has over economies.
So is the risk another 2008?
Could we have a repeat of the financial breakdown of that year when shadow banking nearly destroyed the global financial system?
The answer is, of course, that is possible.
Private actors now chasing high returns, just as they did in 2008, when regulators looked the other way, could exploit the current situation when regulators are going to be doing exactly the same thing under pressure from the Trump administration.
When the bubble burst, governments bailed out the system in 2008. The risk is that the same might happen now.
This risk is something that we have to understand. Finance loves to dress old risks in new language and call them innovation. Stablecoins are just another form of unregulated deposit-taking, in fact. They aren’t innovative. There is nothing genuinely new about them, or in pretending that private tokens are as safe as state-backed money. All the gains go to speculators. The losses will be dumped on the public.
And stablecoins aren’t just a technical issue. That risk of failure also makes them a democratic one. If private money creation replaces public authority, accountability disappears. The economic policy risk that could flow from this, as a consequence of the greed of oligarchs and their political patrons, is to the whole idea of elected government.
Stablecoins erode democratic sovereignty and hand control to unaccountable elites. So, regulators must stop pretending that stablecoins are harmless experiments. They must recognise them for what they are: systemic risks in the making. And governments should not allow the private minting of tokens that mimic safe deposits.
Every single stablecoin must come with the most prominent government-issued economic health warning because they really do require them.
The fact is, money is and must remain a public good managed under democratic authority. And that is the role of democracy. The debate is not about financial stability. It is about political power.
Who controls money creation, governments or private speculators? Stablecoin has tilted power away from democracy, at the time being, towards oligarchs and political insiders. Now we have to be honest. There is a fight on our hands as to who is to run our economies and in whose interests.
Jean Tirole is right in that sense to be very, very worried, as he said he was to the Financial Times. But you don’t need to be a Nobel laureate to be so.
Stablecoins are shadow banking with new branding, cronyism, plus systemic risk, in other words.
The path that they set us on is one to bailouts, lost sovereignty, and weakened democracy.
If we value stability and democracy, governments must act now to shut them down, whatever those who are making a supposed fortune at present from those who are depositing funds, which are put at risk as a consequence, will say.
The technocrats, the oligarchs, and those who are exploiting the weaknesses of regulation have to be prevented from destroying a great deal that is of value in our societies.
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Who would have thought that a Hayekian pipe dream could turn into a nightmare?
“Putin’s advisor Kobyakov: The U.S. has devised a crypto scheme to erase its massive debt at the world’s expense.
“The U.S. is now trying to rewrite the rules of the gold and cryptocurrency markets. Remember the size of their debt—35 trillion dollars. These two sectors (crypto and gold) are essentially alternatives to the traditional global currency system.
Washington’s actions in this area clearly highlight one of its main goals: to urgently address the declining trust in the dollar.
As in the 1930s and the 1970s, the U.S. plans to solve its financial problems at the world’s expense—this time by pushing everyone into the “crypto cloud.” Over time, once part of the U.S. national debt is placed into stablecoins, Washington will devalue that debt.
Put simply: they have a $35 trillion currency debt, they’ll move it into the crypto cloud, devalue it—and start from scratch.
That’s the reality for those who are so enthusiastic about crypto.”
https://x.com/RussiaDirect_/status/1964868975743180964
From the Final press briefing of the Eastern Economic Forum
Participant:Anton Kobyakov — Adviser to the President of the Russian Federation, Executive Secretary of the EEF Organizing Committee.
There is an English translation button available for the video presentation.
https://forumvostok.ru/programme/press-event-programme/?search&utm_referrer=https%3A%2F%2Ft.co%2F#131998
‘the U.S. plans to solve its financial problems at the world’s expense—this time by pushing everyone into the “crypto cloud.” ‘
Ummm. Who will own the server farms that will host that “crypto cloud” and where will they be located? Will they be Hotel California server farms?
New server farms in USA tend to be located in parts with lowest ammount of water for cooling available, so Death Valley seems appropriate.
They’ll be lovely places.
…that you can check out, but never leave.
As I said a week or so ago.
To control as fully as possible, it is necessary to crush and then allow buying up of suddenly cheap assets.
“Own nothing and you will be miserable”
This has been obvious since Sept 2019 when overnight interbank rates were 10%.
Cue Pandemic!
Resilience of a fiat economy must have amazed the so called economists?
As the dollar depreciates so do stablecoins, while the returns on $280 B of treasuries seems like enough to run the computer servers, lawyers, and electricity. Why not talk about the real threats: that someday those treasuries won’t be there to back the tokens, and that they are probably being used to bribe decision makers right now.
I’m elated to announce the launch of Bribecoin-whose value goes up everytime Benedict Donald receives tributes out of lawyerdom and/or the press,
Maybe I am being obtuse but if you move treasuries to stablecoins then devalue them dont the investors lose and require a bailout which then creates more debt?
The ‘investors’ in this case would be anyone left holding stablecoins or the Dollar (versus eg. gold, or *gulp* bitcoin). That’s a feature, not a bug; it’s essentially a method of lump-sum taxation where money goes in, and a programmable amount does not come out. The goal isn’t to make investors whole… the goal is to make elite investors whole, at the expense of the proles, and the USD zone generally.
So they may not bail anyone out this time. They may let USD collapse and adopt a different currency (a la Nixon shock), which will have gained legitimacy through the ongoing $-emigration we are witnessing (which is better thought of as value emigration). Those in the know will have prepositioned themselves in the safest vehicles to preserve their wealth while the rest of us play out Cormac McCarthy’s visions.
That may be conspiracy re: programming/manipulation, but understand this crypto-system is infinitely scalable, astoundingly quantifiable , and the feedback mechanisms built into it are a central planners dream; likely Skynet’s nervous system.
*… the cryptocurrency ‘market’ as it stands is essentially a method of lump-sum taxation… inject real $ into a virtual nether realm divorced from even philosophical relevance, deflate the resulting bubble with sheer sentiment, repeat (as many times a second as hardware permits!), and make everyone so desperate that they have to sit at the table!
Ok, so now I have even more questions about how this grift is supposed to work. On top of the risk that stablecoins might not be backed by the assets they claim, there’s this –
“They pretend to be fully backed assets, just as the bonds that were marketed at that time claimed to be. But the risk is that the US Treasury bonds, that stablecoin funds are supposedly invested in, provide too low a yield in real terms to provide the backing for those who promote these funds, and they will therefore abandon this form of asset backing and instead go for riskier assets with higher returns. At that point, the very idea of stability, which is implicit in the name stablecoin, will disappear, and one shock could collapse the whole system.”
I’d thought these coins were supposed to be stable, as in 1 coin = 1 US$. So why are their investors expecting a return to begin with??!!?? Why not just purchase treasuries straight up? (One possibility is that it is all part of a larger scheme to artificially increase demand for US Treasuries and strengthen the US$, which does make some sense in a grifty sort of way) And if there are returns, who do they go to – the holders of the stablecoins, which would essentially be a mirror of banks paying interest on a deposit account, or to the stablecoin companies themselves?
Also, even if stablecoins are fully backed by US treasuries that pay some return, wouldn’t they be subject to the same issues that took out Silicon Valley Bank? I believe it was Michael Hudson who explained that the problem there had been that the bank held a lot of Treasury bonds in reserve that it had intended to hold until maturity. The Treasuries had been purchased at lower interest rates, and the Fed began signalling that it would be raising rates soon, meaning the face value of the bank’s current bonds would go down. The bank should have purchased new bonds with higher rates to counteract this, but they didn’t. That still wouldn’t be a problem either if the bonds were held until maturity, but once depositors started clamoring for their cash, the bank had to sell the bonds they had below face value, which caused them to go belly up. So wouldn’t stablecoin issuers have to pay very close attention to what the Fed is doing and layer their Treasury purchases accordingly? Or maybe not – I read somewhere that stablecoins were using shorter term Treasury bills as opposed to longer term notes or bonds. So if you’re just cycling through 4 week T bills, it might be easier to stay pegged to the current value of the US$.
And here’s hoping for a NC meetup again at some point in the future – it would be great to be able to discuss some of these issues at length. I have a lot more questions about all this!!
“Also, even if stablecoins are fully backed by US treasuries that pay some return, wouldn’t they be subject to the same issues that took out Silicon Valley Bank?”
Do the assets supporting stable coins need to earn a return, or are they just collateral? I would hope stable coins would invest in seven day treasuries, but I would also have hoped that AIG would have invested its 2008 securities lending funds in AAA securities instead of relatively illiquid subprime RMBS. Perhaps some stable coin issuers will take on risk for yield and this will lead heightened risk.
I was under the impression that stablecoins were devised to provide somewhat stable liquidity to notoriously illiquid crypto, and that the danger came from the fact that if their parity to currency somehow breaks down, they threaten to take the entire crypto economy (by essentially causing what amounts to a bank run).
I would quibble with the point that “If private money creation replaces public authority, accountability disappears” is already the case; private enterprises (banks) create money through loans, which central banks make adequate through overnight lending based on the interest rate. Crypto is just a deflationary unstable version of that which consumes a lot of energy to “produce” (i.e. it’s computer gold without the traditional belief on gold as a valuable asset).
I was just pondering this the other day, about the crypto-con in general, that this is an attack on national sovereignty.
The technocrats, the oligarchs, and those who are exploiting the weaknesses of regulation have to be prevented from destroying a great deal that is of value in our societies.
…a bit late for that…
Where was this author when fractional reserve banking started? Start regulating that. Stablecoins are small potatoes. Fully reserved banking is a return to sanity.
Do you make a habit of putting your foot in your mouth, chewing, and then acting superior for your appetite for leather?
We are not in a fractional reserve banking system. That bogus idea is based on the long-ago debunked loanable funds fallacy. Banks create money out of thin air by making loans and with that, the corresponding deposit.
I guess if you want to implode the economy fully reserved banking would be a good idea. Man, loanable funds theory has made irreparable damage to people’s notions of how things actually work. Go check out Mitchell Innes’ articles about the credit theory of money, they might clear some points.
For example, one of the most popular stablecoins Tether claims to be 100% backed by assets but doesn’t allow audits and allegedly is only 30-40% backed with mostly bitcoin. Its current market cap is $150 billion, so once the game is up it will blow a $100 billion (or worse) hole in the crypto markets.
I see the whole crypto thing as an ultimate capitalist product, there is zero production cost for the capitalist (initial currency issuer) and it has zero utility. It’s a perfect money extraction machine.
Thank you for Richard Murphy on this sweet topic. Maybe we should consider issuing adjustable rate Treasuries. Call them Stable T-Bonds. If we are going for digital currencies why not digital, flexible bonds as well? I’m not being facetious. It is a massive political revolution being financially coordinated. Like a giant rug pulled out from under our feet. But the only fact that remains standing is that “money” is not, nor ever was, a “store of value”. It has always been equivocal precisely because it is a medium of exchange. Here’s what we should do: Let’s declare Time to be a public good, an actual and tangible good. Then let’s base all our assessments and appraisals of value on time required to achieve them, and make it flexible and evolving as well. On a real time basis. Quantum AI could do this no sweat. And maintain the value of things in relation to each other in a continuing balance. That’s not crazy. It’s reality. And the value of money whether Stable Coin or Yuan will be achieved as it emerges, for the good that spending money achieves over time. We are stupidly obsessed with money because it is monopolized and scarce. But if money were based on the time it takes for good social things to emerge from its investment and use we would exchange our frantic greed with ongoing responsibility to each other and the planet. And blablablah.
If stablecoins are supposedly backed by solid assets, what is their advantage over simply owning those solid assets?
I don’t think treasuries are solid assets
Liquidity, the same reason you walk around w greenbacks and not T-bonds. They enable the instantaneous, and relatively autonomous/anonymous movement of funds, with novel opportunities for structuring transactions. These are advantages of crypto generally, but the stablecoin is meant to provide legitimacy and faith in digital markets, the ‘safe’ haven everyone runs to (but doesn’t cash out of) when the crypto market tanks. In this way I believe stablecoins also serve as a (psychological cum economic) buffer between the real and digital economies.
Aren’t Money market funds backed by short term treasuries a kind of stable coin. They do have 100% backing and they are audited. But what happens to my federal money market fund if the stable coin market collapses?