The Genius Act and Stablecoins

A New Financial Paradigm or Systemic Risk?

The financial landscape is undergoing a seismic shift with the rise of stablecoins and the introduction of the Genius Act. This legislation, alongside related proposals like the Clarity Act and the anti-CBDC Act, signals a pivotal moment for the integration of digital assets into the global monetary system. But beneath the promise of innovation lies a web of risks and power dynamics that could reshape the economy in ways few fully grasp.

What Are Stablecoins?

Stablecoins are blockchain-based assets designed to maintain a stable value, typically pegged to a fiat currency like the U.S. dollar. Unlike decentralized cryptocurrencies such as Bitcoin, stablecoins are issued by centralized entities, often fintech or crypto companies, that promise to back each unit with an equivalent amount of fiat or other assets, such as short-term U.S. Treasuries. This setup allows users to send digital dollars globally with the ease of an email, provided they have a wallet address and understand the system.

The issuer holds deposits in a bank or invests them in yield-generating assets like Treasuries, creating a model akin to full-reserve banking but with a twist: the issuer incurs zero cost of funding. The largest stablecoin, with a market cap of approximately $165 billion, generates significant profits by investing in short-term bills and even holding Bitcoin as part of its reserves. This model has proven lucrative, with some issuers reportedly outpacing traditional financial giants in profitability.

The Genius Act: A Game-Changer or a Power Grab?

The Genius Act, part of a broader legislative package, aims to regulate stablecoins and integrate them into the financial system. It allows banks with Federal Reserve accounts to issue stablecoins backed by their reserves, potentially transforming base money (bank reserves) into broad money that circulates as currency. This could amplify the Federal Reserve’s control over the money supply, as each dollar deposited with a stablecoin issuer could effectively double the currency units in circulation, one in the form of the stablecoin and another when the issuer reinvests the dollar in Treasuries.

However, the Act heavily favors traditional banks. Only entities with a banking license and a Fed account can pay yield on stablecoins, effectively sidelining non-bank issuers like those dominating the current market. This consolidation hands a competitive advantage to institutions like JPMorgan, which is reportedly developing its own stablecoin for large-scale wholesale transactions. Critics argue this is a deliberate move to entrench the power of established financial players, creating a "covert" central bank digital currency (CBDC) under the guise of private innovation.

Systemic Risks and Market Dynamics

The stablecoin model is not without risks. While issuers claim full backing, their investments in Treasuries or other assets introduce vulnerabilities, such as interest rate risk. A notable example is the second-largest stablecoin issuer, which held $6 billion at Silicon Valley Bank during its collapse. When uncertainty hit, the stablecoin’s value dropped to 90 cents, reflecting market repricing of risk. Unlike traditional banks, stablecoins don’t rely on bailouts; the market adjusts through de-pegging, but this can trigger panic selling and potential runs on the issuer’s assets.

The interconnectedness of stablecoins with the broader financial system amplifies these risks. If a major issuer’s assets are mismanaged or devalued, it could cascade through the system, affecting banks, custodians, and other institutions. The Genius Act’s allowance for banks to issue stablecoins against reserves introduces new attack vectors, potentially depleting reserves or creating liquidity mismatches.

The Orwellian Undercurrent

Beyond financial risks, the Genius Act and related developments raise concerns about surveillance and control. Stablecoins, while offering low-friction payments and global accessibility, are centralized and trackable. Issuers can freeze or sanction wallet addresses, and transactions are recorded on immutable blockchains. When combined with the consolidation of data across government departments, enabled by recent legislation and handed to private firms with ties to the military-industrial complex, the stage is set for a surveillance state. Artificial intelligence, already used by major asset managers and government contractors, could process this data in real time, enabling social credit systems or resource allocation without free market price signals.

The involvement of major players, asset managers, tech moguls, and crypto lobbies, suggests a coordinated effort to centralize financial and data control. The same entities backing stablecoin initiatives are also major shareholders in technology and defense firms, creating a "club" that operates beyond public accountability. Recent political maneuvers, including significant crypto lobbying and questionable token sales, further muddy the waters, hinting at conflicts of interest at the highest levels.

What Should We Watch For?

For those concerned about freedom, free markets, and financial sovereignty, the implications are stark. The Genius Act, while framed as a pro-innovation move, risks consolidating power in the hands of a few banks and tech giants. The ability to issue stablecoins against bank reserves could inflate the money supply, destabilize markets, and erode the distinction between base and broad money. Meanwhile, the integration of stablecoins with centralized ledgers and AI-driven data systems threatens individual privacy and autonomy.

Key areas to monitor include:

• Bank Dominance: Watch how traditional banks leverage their Fed-backed advantage to crowd out non-bank issuers.

• Data Consolidation: Track the expansion of centralized data systems, particularly those managed by firms with government contracts.

• Systemic Risk: Pay attention to stablecoin issuers’ asset management practices and their exposure to volatile markets like Treasuries or cryptocurrencies.

• Regulatory Capture: Scrutinize lobbying efforts and political ties that shape crypto legislation, especially those favoring specific blockchains or companies.

Conclusion

The Genius Act and the rise of stablecoins represent a double-edged sword. On one hand, they promise frictionless global payments and financial innovation. On the other, they risk entrenching a surveillance-heavy, bank-dominated system with significant systemic vulnerabilities. The public must remain vigilant, questioning the motives behind these developments and advocating for transparency and decentralization. Without scrutiny, the financial system could slide into a dystopian reality where a select few control both the money and the data, leaving the rest of us outside the club.