The GENIUS Act is Anything But

~by Sean Paul Kelley

This post is meant to piggy-back on Ian’s recent post, “The Next Big Crash Is On Its Way.” There has been little coverage in the legacy media of the GENIUS Act. This recent legislation, passed by both Houses of Congress and signed by President Trump is about “regulating” the crypto-economy. The GENIUS Act is an acronym for “Guiding and Establishing National Innovation for U.S. Stablecoins.” Why Congress is so addicted to these stupid acronyms is beyond me. I prefer the old Roman way, naming a law after the legislator who initiated it, such as the Nunn-Lugar Act of 1991, or the McCain-Feingold Act of 2002. The acronym of this act is also antithetical to what it is. It’s a fools act of financial deregulation, which in my opinion will accelerate and exacerbate the coming financial crisis.

But first, the legislative highlights:

• Stablecoins to be pegged 1:1 to the dollar. Tokens must be backed with cash or short-term treasuries. Issuers cannot offer interest. There is a loophole, however, and I will discuss it later.
• Establishing rules for stablecoin issuers to segregate of reserves, undergo monthly audits and establish minimum liquid capital requirements.
• Developing anti-money laundering and anti-terrorist processes.
• Designating which parties are permitted to issue stablecoins.
• Giving the Department of Treasury, Federal Reserve, Office of the Comptroller of the Currency and FDIC greater regulatory power.
• Classifying stablecoin owners when a custodian or issuer files for bankruptcy.

The main idea behind the act is to make stablecoins a reliable crypto-currency to invest in. So what are some of the potential negative consequences of the act? The Kansas Fed notes, “Funds flowing into stablecoins have to flow out of another source. If stablecoins are purchased out of checking accounts, for example, then these purchases represent a shift of funds from banks (as deposits) to issuers (as stablecoins) . . . . This potential flow of funds from bank deposits into stablecoins could increase Treasury demand but also could reduce the supply of loans in the economy.”

In fact, the Treasury warns that $6.6 trillion of assets could be lost by the banks into stablecoins. Stablecoins have the potential to decrease the money supply, create a chilling effect on banks issuing loans, which would drive up interest rates. Moreover, issuers of stablecoins will be able to examine every single purchase you make. As far as I can tell there is no privacy provision in the act, nothing preventing issuers from selling stablecoins owners data.

Who is going to regulate Stablecoins? The SEC has no investigative or enforcement budget. The IRS has been effectively neutered. The FDIC will have no role in stablecoins so long as they are not FDIC insured. With no real oversight issuers can simply put any kind of triple-A rated assets to back them—even when the ratings of the triple-A rated assets are fraudulently obtained–like the CDOs that caused the 2008 financial crisis. That’s what Bear Stearns tried to get away with in late July 2007, when two hedge funds filed for bankruptcy. It was always my understanding that these were money market funds. Perhaps the real story has gone down the memory hole. Nonetheless, who is to say stablecoins, without real oversight and constant audits—seriously, as I just said, the regulatory agencies have no enforcement budgets—won’t be backed by treasuries? This is also a serious workaround of the Fed. It will without any doubt reduce its ability to manage interest rates and fight inflation, which is its legal remit, at present.

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The largest issuer of stablecoins is Tether, having issued $155 billion so far. Tether is registered in El Salvador, has 150 employees and claims to hold the “majority” of its reserves in cash and short-term treasuries. The company has done its best to avoid audits and remains opaque. Morgan Stanley writes that in “2021, the Commodity Futures Trading Commission (CFTC) fined Tether for misleading disclosures on its reserves.” My question to Ether management (and regulators) is what constitutes a majority? 50.1%? 75%? 95%? And what assets are in the minority? Are there derivatives that leverage Tether’s holdings? What kind of leverage? 10:1? More? This question goes right to my next concern.

Just who can issue stablecoins? Anyone. Amazon is exploring issuing them. So is Walmart. So are the big banks. Maybe even Palantir? My great fear is that it will allow a complete takeover of our financial system by Big Tech companies. Even the states can issue stablecoins. What’s worse, no amendments were passed to make sure that crypto companies absorb losses, instead of a Federal bailout. When this metastasizes it will make 2008 and 1929 look like picnics.

More questions than answers, it seems: “Do we want our payments system managed by Walmart?” asks Barry Eichengreen. I’d also ask if we want Silicon Valley to gain power over our financial system? Do you want Palantir, X, Meta or Google to issue legal tender? As Barry Eichengreen warns, “do we want X to know every detail about our every transaction, which they would if we used their stablecoin, or would we prefer the Fed to be the entity that issues the digital money that we use?” Me? I’m flat out opposed to digital money. I want to continue to use cash for one simple reason: anonymity, which is the same thing as saying, privacy.

And about that loophole: while stablecoin issuers cannot offer interest on the tokens, they can issue rewards. Some companies are already giving away annual awards that equal 5.5%. What this means is that the companies issuing rewards are juicing their own returns somehow, and there is no way that the coins are 1:1 100% backed by cash and short-term treasuries. One month treasuries are paying 4.26%. How do you make money paying 5.5% when you’re only getting 4.26%. You see the problem? They absolutely must have other higher interest paying investments in their portfolio. Otherwise they’d go broke. It’s just not possible to sustain. That leads to fraud and fraud is a direct line to corruption. Like this corruption on an epic scale: The Trump family’s investment in World Liberty Financial has increased their wealth by $5 billion. 

Hillary Allen summarizes the risks:

By opening the floodgates for “stablecoins,” Congress has made the US financial system more vulnerable to crises, increased the chances of government bailouts for tech platforms, and further entrenched Silicon Valley’s political power. In fact, such outcomes seem to be exactly what some techno-boosters want.

I hope to write more on this as I more fully comprehend the risks. But what I can say knowing what I now know, this is far from genius: more like mass stupidity and it will not end well.

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