Genius Law: The new American cryptocurrency law is worrying economists. It can pave the way for the next world financial crisis.
On June 17, the US Senate approved the Lei Geniuswhich was considered a great victory for the sector of cryptocurrency.
The bill aims to regulate a type of cryptocurrency known as “”.
However, as the Catalan economist says Sergi Basquein an article no, a closer look at the law reveals that it can, very easily, to lead to others world economic collapse.
To understand Genius Law, let’s look at the beginning of cryptocurrencies. They were created as decentralized currencies whose offer – and therefore value – would not be determined by people in fact dark in Washington DC or Frankfurt, but by a Complex and globalized computer system.
The most prominent of the first cryptocurrencies was, and the idea was that it was similar to gold. It could be extracted to provide a (almost) constant supply, offering a return to the age standard era, when the value of any currency was determined by the value of gold and not by national economies.
However, the most benign way to define cryptocurrency today is a casino. In fact, people invest in cryptocurrencies precisely because They are not stable and reliable like gold, but because their volatile value can lead to huge returns on investment.
Since the factors that determine their price are not often clear, investment in cryptocurrencies is essentially a data launch. Getting profits in the cryptocurrency trade is often as likely as winning in the roulette.
Make cryptocurrency
The cryptocurrency industry understood that this high volatility (and unpredictability) was a barrier to attracting more cautious investors. To give an appearance of stability, companies started to create “StableCoins”: cryptocurrencies whose prices are indexed to another currency.
Imagine, for example, that a given company called “T” creates its own cryptocurrency, “t-coin”which is indexed to the US dollar at a rate of 1: 1.
If we buy a T-Coin, we know we can go back to the company T and get 1 USD. If the company cannot provide me 1 USD, the currency and the company collapse and Investors who bought T-Coin lose their money.
This type of collapse is far from hypothetical. In South Korea, in 2022Stablecoin Terra, indexed to the dollar, fell to the pike, causing a cataclysic collapse that eliminated about half a billion of dollars from international cryptocurrency markets overnight.
Secure cryptocurrencies?
Sergi Basco says that a few years ago he had the “pleasure of visiting a casino in Las Vegas”.
At the entrance, he exchanged US dollars for casino chips or chips, which he used instead of money inside the casino. If, by the end of the night, some chips still remained, could change them again for dollars at the same rate.
A stablecoin is essentially the same, but with electronic tokens instead of casino chips.
With the approval of the Genius Law in the US Senate, large companies such as Amazon and Walmart are already planning to issue their own stablecoins for use of customers.
But the idea of companies having their own currency raises some serious questions. They will be able to Using Amazon tokens to pay on Walmartvice-version egg?
Is the value of Amazon tokens the same if I use them to pay on Walmart? If each of the US large companies decide to create their own token, what token use for each transaction?
Once Genius Law will regulate StableCoins, people may think that all stablecoins are equally safe. However, this is impossible to guarantee and Substances are huge doubts on how companies will be able to take advantage of their own stablecoins.
The next world financial crisis
During his trip to the casino, Basque says he had no fear that when he was going to change my tokens for US dollars, the establishment would comply with its part of the agreement.
However, imagine that I would take the chips home and come back the following night and found that the casino had closed or that it had not enough dollars to raise my money.
The world has lived several monetary seizures like this, where a country, instead of a company, issues an indexed currency.
Argentina is the classic example. Between 1991 and 2002, the Argentine Central Bank promised to exchange a weight for a dollar, but this artificially distorted trade with economies that do not use the dollar. This was followed by an economic crisis, which worsened when parity was finally eliminated.
Now imagine that in the US, a large company emits 100 billion stable currencies indexed to the US dollar. The company is successful and has sufficient assets (including US Treasury securities or obligations) to ensure currency value. It continues to issue more “Stablecoins”, but then their finances suffer a turnaround.
This would trigger a chain reaction. At one point, investors would be aware that the company issued more stablecoins than the value of the US Treasury securities it claims to have. They would then begin to return StableCoins, which would lead the company to sell its US Treasury titles to (probably unsuccessfully) calm nervous investors.
“The effects start quickly to feel,” says Sergi Basco.
A sale of US obligations would reduce the price of their own obligations, causing a Increased US interest rates. A sudden, unexpected and drastic increase in US interest rates could easily translate into a global financial crisissince banks and governments around the world would suddenly face bouts of solvency.
Regulation is not a guarantee
Under the new legislation, companies that issue StableCoins will be regulated and regulators will make sure they have enough reserves to fulfill their promises if investors start to panic.
However, the US financial regulators are not infallible.
Still a few years ago, they did not notice that Silicon Valley Bank had too many assets at risk of increased interest rates, a lapse that caused the bank’s collapse in 2023.
“Therefore, it is not difficult to imagine a situation where several companies can irresponsibly issue too much Stablecoins. If this happens, the consequences may be terrible, not only for the US, but for the entire world economy“, Concludes expert Sergi Basco, in his article.
