Former Greek Finance Minister suddenly warned: Stablecoin is like a time bomb

Author Yanis Varoufakis is an economist and former Greek finance minister. He has written several bestselling economic books, most recently Another Now: Dispatches from an Alternative Present.

Francisco Goya warned the world in his print, Reason Sleeps, Monsters Are Born, about the terrible forces that are unleashed in the mind when reason lets down its guard. Now, as President Trump’s dream of cryptocurrency becomes a reality without the constraints of reason, stablecoins are becoming a terrible force unleashed on the global economy. With the Senate’s passage of the Genius Act on Tuesday, stablecoins are one step closer to becoming the core of world finance.

Stablecoins are the bastard child of two seemingly eternally opposed camps: the libertarian-worshipping crypto community and the dollar-worshipping nationalists. Stablecoins are built on blockchain technology designed to dismantle the financial oligarchs (Wall Street and the Federal Reserve), but are closely linked to the financial oligarchs' most powerful totem, the dollar, at a 1:1 exchange rate. As a result, a supposedly apolitical currency is closely linked to the most politically dominant form of money.

Stablecoins are considered the best of both worlds. While they lack the terrible volatility of Bitcoin, they retain the freedom of anonymity and global transactions - without any government regulation. Putting aside their usefulness to criminal gangs like the Mafia, who naturally crave any means of payment that can lubricate their transactions, stablecoins are a godsend to people in countries with fragile monetary systems, especially in Africa. In addition to providing a readily available alternative to the dollar for those without bank accounts, stablecoins offer a more reliable way to send money across borders than shaky interbank transfer systems such as SWIFT, bypassing US sanctions.

In short, as long as governments ignore stablecoins, they can do considerable good without causing much harm. However, now that the Trump administration is weaponizing them for its own purposes, the potential for serious damage has increased exponentially. Two executive orders issued by President Trump (one on January 23, 2025 and the other on March 6, 2025) and now the Genius Act are turning stablecoins into a giant time bomb buried deep in the foundations of the global economy.

Today, the dollar value of stablecoins in circulation is about $250 billion. To ensure adequate reserve backing, issuers purchased an estimated $40 billion in U.S. Treasuries last year, a figure that exceeds the purchases of any foreign Treasury buyer through 2024. That same year, stablecoin issuer Tether alone reported an annual pre-tax profit of $13 billion—not bad for an offshore company with about 100 employees.

"Stablecoins are seen as the best of both worlds."

As for the number of crypto wallets that include stablecoins, it jumped from 27 million to 46 million last year, and transaction volume increased by 84%, from $409 billion to $752 billion. Stablecoins already account for about 80% of all crypto transactions.

Such rapid growth will only encourage financial institutions that were originally designed to disrupt cryptocurrencies. Giants such as Visa and Stripe have jumped on the bandwagon, and big tech companies will follow suit, seeking revenge on Wall Street for squeezing them out of the payment system. Even Uber, eager to stem the flow of more money from its ride-hailing platform to financiers, is developing a fully autonomous cross-border stablecoin.

Long before the Trump administration’s Genius Act boosted stablecoins, Standard Chartered estimated that stablecoins in circulation would grow eightfold to over $2 trillion by 2028. The question, then, is why are Donald Trump, JD Vance, and their fellow “Make America Great Again” enthusiasts so bent on pushing stablecoins further?

Beyond the obvious motive of self-enrichment, the more interesting explanation is that stablecoins fit perfectly with the Trump administration’s goal of reducing global trade imbalances and “making America great again.” Nothing motivates these people more than the idea that what’s good for their bank accounts is good for America.

Team Trump’s intentions are clear: devalue the dollar and shrink the U.S. trade deficit while using the threat of tariffs to maintain its dominance. Stablecoins play a key role in this plan. For example, suppose Japan is forced to use a significant portion of its $1.2 trillion in assets to buy dollar-denominated stablecoins. The total supply of dollars will rise, causing the dollar to depreciate. Stablecoin issuers will use the dollars they receive to buy U.S. Treasuries, thereby reducing the U.S. government’s borrowing costs and, in the process, consolidating the dollar’s ​​hegemony. In the words of JD Vance, greater adoption of stablecoins will “strengthen our economic strength.”

But stablecoins present systemic risks that Team Trump should not ignore. Stablecoin issuers can profit by issuing more tokens than they raise dollars for, or by buying securities that are relatively less liquid (but offer higher interest rates). When stablecoins are small (for example, in 2021, New York regulators fined Tether $21 million for undisclosed reserve violations), the threat of bad reserves is negligible and doesn’t keep people up at night. As stablecoins pass the $2 trillion mark, however, the risk could become greater than the 2007 subprime mortgage crisis.

As dollars flow from domestic bank accounts into stablecoins, demand for U.S. Treasuries rises and their yields fall. Banks must raise interest rates to stem the outflow of funds, while the Treasury must issue more Treasuries to meet the growing demand. A sudden divergence between different types of interest rates occurs: bank rates and long-term Treasury rates rise, while short-term Treasury rates fall, leading to the so-called yield curve steepening—a clear sign of financial instability.

In 2023, Circle, the issuer of USDC (the second largest stablecoin), held $3.3 billion in reserves in custody with Silicon Valley Bank (SVB). When the latter collapsed, a run on USDC began and its peg to the dollar broke. If the Fed had not rescued SVB, Circle would have collapsed. This episode now seems like a piece of cake, as the US Treasury Department predicts that $6.6 trillion in US bank deposits are migrating to stablecoins in the new environment shaped by the Trump administration's praise of cryptocurrencies and the "Genius Act".

Wall Street is keen to use blockchain-based technology to speed up, secure and reduce the cost of securities transactions - trying to disrupt the traditional shaky securities trading system, just as stablecoins disrupted SWIFT. But to move trading in stocks, bonds, derivatives, and all sorts of exotic financial contracts to a blockchain, the contracts and tokens must be embedded in the same blockchain. That means an arms race is about to begin over which dollar-backed stablecoin will dominate securities trading. Once the answer is revealed, its use is bound to soar. However, if the private company that issues such a stablecoin gets into trouble, the entire stock market and the $29 trillion U.S. Treasury market will be at risk.

What happens if a stablecoin issued outside the United States collapses? Non-U.S. institutions, including European institutions, do not have access to the Fed's rescue facilities. Will the Trump administration provide European banks with a Fed swap line, as it did in 2008? It's doubtful. Therefore, a dollar-backed stablecoin issued in Europe, Asia, Africa, or Latin America risks exporting financial fragility around the world. Even the European Central Bank is panicking at the prospect of having to find dollars to bail out holders of eurodollar-denominated stablecoins.

Meanwhile, developing countries face a trilemma: ban stablecoins (giving up their huge benefits), create sovereign alternatives, or accept deeper dollarization. With its digital yuan, China has wisely chosen to ban stablecoins outright, thereby protecting its financial system. However, its $4.5 trillion in dollar reserves poses a dilemma—selling dollars helps the Trump administration devalue the dollar, while holding dollars risks exposure to US-led volatility. The preparations of the BRICS countries stand in stark contrast to most economies, which are caught between dollar dependence and the instability brought about by cryptocurrency experiments.

The Genius Act is therefore hard to fault—if its purpose is to maximize the threat of financial collapse. In essence, the bill weaponizes stablecoins to privatize money and effectively outsources dollar dominance to pro-Trump tech giants.

Many Democrats are proving their folly beyond measure by supporting this bill. First, the bill would protect their cronies on Wall Street by passing a ridiculous ban on interest-paying stablecoins. Second, the bill would purportedly regulate Trump’s new digital “Wild West.” How? Issuers of stablecoins worth less than $50 billion would be subject to state regulation, which would allow thousands of smaller stablecoins to flourish across the United States. As for systemically important stablecoins, including those domiciled outside the United States (such as El Salvador-based Tether), they would be required to undergo “independent” audits of the quality of their dollar reserve assets.

The Genius Act paves the way for a massive crash. The drafters of the bill did not clearly define how reserves would be regulated, and inexcusably ignored the risk of a vicious cycle. But there is a far worse side to the bill. It strips the Fed of its power to issue its own stablecoin, a digital dollar to rival the digital yuan already in use by the People’s Bank of China. Moreover, the Fed will be stripped of necessary tools (like a regulatory equivalent to the FDIC), and instead be asked to clean up the mess that private stablecoin issuers will inevitably create.

It’s human nature to err in the realm of financial innovation. But to screw it up completely, all it would take is for the U.S. government to facilitate private stablecoin issuance, cloak it in the legal cloak of light regulation, ban the Fed from using the same technology, and deprive it of the means to clean up the inevitable mess. With the Genius Act, we’re almost there. Now is the time to oppose it, to block it, to repeal it.