Reports Revealed That the Boom in Stablecoins Like USDT and USDC Has Renewed Fears About the Looming Risks These Tokens Bring to the Crypto Industry and the Overall Financial System

Reports revealed that the boom in stablecoins like USDT and USDC has renewed fears about the looming risks these tokens bring to the crypto industry and the overall financial system.

Reports revealed that the boom in stablecoins like USDT and USDC has renewed fears about the looming risks these tokens bring to the crypto industry and the overall financial system.

As reported by Bloomberg, the administration of former President Donald Trump and Congress were both pushing to cement the growing importance of stablecoins. Two bills designed to give stablecoins a bigger role in the global payments infrastructure are running through the House and Senate.

The administration’s interest, which includes vocal support from Trump, helped encourage the steady flow of new money into the stablecoins sector—even as other sectors of the crypto industry struggled—bringing the total value to over $230B.

However, Senator Elizabeth Warren (D-Mass.) said that the bill lacked the basic safeguards necessary to ensure that stablecoins did not blow up the entire financial system. The senator explained that the bill allowed stablecoin issuers to invest in risky assets, including assets that were bailed out in 2008.

The commentary comes as researchers at the Federal Reserve Bank of New York and the Financial Stability Oversight Council called attention to these run risks in multiple papers published last year. Additionally, various central bankers have spoken about the risks in recent speeches.

“If a run on a large stablecoin were to occur, liquidation of the assets backing the stablecoin could be disruptive, especially if those assets were linked to other funding markets.”

Lisa D. Cook, a governor on the Federal Reserve’s board

Matthew Bisanz, a financial regulatory partner at Mayer Brown, doubted whether a U.S. dollar-backed stablecoin that is denominated in U.S. dollars could be vulnerable to a run because the coin can always pay the redeemer in U.S. dollars.

However, Bisanz acknowledged that if those dollars were deposited at a bank and the bank needed to liquidate assets to fund withdrawals by the stablecoin holders, then there could be a run. But that would be the same type of run that could happen to any fractional reserve depository.

“The commonality in these scenarios is that a bank would be forced to sell assets in an attempt to meet demand for dollar deposits, which could create a vicious cycle of asset price declines and bank failures.”

A new report by the Institute for Law and Economic Policy also highlighted the risks posed by the bipartisan bill to quickly create a legal framework for stablecoins. The report's authors, Mehrdad Hajaj and Gary Flom, asserted that the legislation would permit stablecoin issuers to hold a portion of their reserves in short-term U.S. Treasury bills, money market funds, or high-quality, liquid municipal securities.

The administration highlighted that the bill would impose strong safeguards on stablecoins to ensure financial stability. The bill's supporters, including House Financial Services Chair Maxine Waters (D-Calif.) and Senate Banking Chair Pat Toomey (R-Pa.), emphasized the importance of regulating the burgeoning industry to prevent the buildup of risks.

During a March 11 hearing, lawmakers delved into how stablecoins could revolutionize payments without imposing an excessive regulatory burden. The inquiry arose as the Senate Banking Committee prepared to vote on a bill regulating stablecoins, focusing on the potential benefits and risks.

The Trump administration and Congress were making a push for stablecoins as part of broader efforts to modernize the U.S. financial system. The administration and its appointees had been rolling out proposals and discussing the issue throughout the year.

The administration officials and appointees also highlighted the importance of maintaining the U.S. dollar's dominant status in the global financial system, especially in light of the growing use of cryptocurrencies like bitcoin.

"The bill provides for a U.S.-dollar-backed stablecoin to be regulated and licensed by the federal government, opening the door for a new era of innovation in digital assets and payments."

The administration appointees said that legitimizing stablecoins helps firm up the U.S. dollar’s dominance as a global reserve currency. The bill would require stablecoin issuers to be licensed and back their tokens one-to-one with approved assets like cash, short-term U.S. Treasury bills, repurchase agreements and money-market funds.

However, a professor emeritus at George Washington University Law School, Arthur E. Wilmarth Jr., published a policy report last month calling attention to some of the vulnerabilities that the proposed legislation did not address.

According to Wilmarth, even safe, short-term U.S. Treasury bills, which would be allowed into reserves in the proposed legislation, are vulnerable to bank runs and had been frozen up during previous crises. He also noted that Circle’s USDC only managed to recover its peg in 2023 after federal regulators stepped in to cover all of Silicon Valley Bank’s uninsured depositors.

"The administration is rolling back critical consumer protections and inviting a new financial crisis with this reckless bill," said Senator Elizabeth Warren (D-Mass.). "It's