May a Thousand Stablecoins Bloom, With a Crisis or Two Along the Way

Introduction

With the signing of the so-called ‘GENIUS Act’ by President Donald Trump in July 2025, a framework for regulating stablecoins was promulgated in the United States. Stablecoins are digital tokens designed to maintain a fixed price relative to a reference asset, most often the U.S. dollar. That is, one stablecoin for one U.S. dollar. Stablecoins have been hailed as a financial and technological innovation that can improve economic growth and financial inclusion by revolutionizing payments, especially cross-border payments. Unfortunately, stablecoins also pose systemic dangers to the economy, and their current growth trajectory heightens systemic risk and will likely result in a financial crisis. 

New Private Money, Old Public Problems

While the technology underlying stablecoins is indeed new, the economics are not. To see why, we first observe that an economy’s medium of exchange—commonly referred to as ‘money’—is an instrument that should be ‘information-insensitive.’  Said differently, the price of money is not supposed to fluctuate based on the arrival of new information. The price adjustments that occur because of changes in supply and demand—like the price adjustments for apples or oranges upon learning of a drought—should not apply to money. A ten-dollar bill should always transact for ten dollars. 

But if the price of money is designed to remain fixed, then the law of supply and demand dictates that its quantity must change. These quantity adjustments occur most dramatically during a so-called ‘bank run,’ when people no longer wish to hold any of the money in question. This run risk has manifested itself throughout history, as seen with uninsured bank deposits before the advent of deposit insurance, repos during the 2008 financial crisis, money market funds in 2008 and 2020, and bank failures in 2023.  

Stablecoin issuers recreate this age-old ‘money problem.’ By engaging in maturity transformation and offering redemptions like bank accounts and money market funds, stablecoin issuers are susceptible to runs during times of panic. What could trigger such a run on stablecoin issuers? That’s hard to predict, but here are a few possibilities: there could be accounting errors at a few issuers and stablecoin holders think such errors are pervasive. Or stablecoin holders could believe that issuers are issuing more and more coins, but unbacked. Or one or two crypto exchanges—where stablecoins are traded—collapse and confidence is lost across the crypto ecosystem. Once the stablecoin industry is large enough and embedded in the economy, runs on issuers can lead to tremendous societal problems, namely, a full-blown financial crisis. 

History Recommends a Sovereign Alternative

The circulation of private money is not a new phenomenon. Historically, private banks issued their own circulating bank notes in response to shortages of sovereign money. During the mid-19th century, for instance, the U.S. government did not print money and there was a shortage of metal coins, so private bank notes were widely used as money. This origin story is similar in other countries, where shortages of circulating currency held back economic growth, and governments permitted the coexistence of private and sovereign money to fill the gap. However, the proliferation of circulating private money led to greater financial instability and to an erosion of monetary sovereignty. 

In the United States, the government’s monetary experiment took a turn during the Civil War. Congress passed the National Bank Act in 1863 to help finance the war by creating national banks to issue their own national bank notes, which had to be backed by U.S. Treasuries. (This part may seem familiar now, since the GENIUS Act requires stablecoin issuers to back their tokens with safe assets, including short-term U.S. Treasuries. But this is where the similarities end.) To facilitate adoption of these new national bank notes, Congress passed legislation that required all banks to pay a 10 percent tax on payments that they made in currency other than the national currency. 

State banks were not pleased as the circulation of their bank notes would be greatly impeded. After a legal challenge by a bank in Maine, which refused to pay the tax, the Supreme Court upheld the tax on the circulation of private money in Veazie Bank v. Fenno (1869). Notably, this tax on circulating private money was expanded in subsequent years and stayed ‘on the books’ for over a century, until 1976. 

Why did Congress eventually repeal the tax? Was it because Congress suddenly wished for private money to circulate once more? No. It was because Congress wanted to streamline the Internal Revenue Code and thought the tax provision no longer served any purpose. Congress repealed the tax on private money circulation because it was so obvious that coexistence was a dead issue at that time—deadwood, to be precise. Who could have imagined that, in the 21st century, entrepreneurs would attempt to reinvent digital versions of the private bank notes that circulated during the 19th century?

Today, the U.S. government is doing the opposite of what it did previously. Instead of maintaining the sovereign monopoly on circulating money, it is pushing for the proliferation of private stablecoins. This will lead us down the path of financial instability. History instead counsels the creation of a sovereign alternative—a national digital currency (sometimes referred to as a central bank digital currency). Doing so would capture the benefits—for example, reducing cross-border transaction costs—without the costs to financial stability and monetary sovereignty associated with private stablecoins.

Conclusion

They say that history rhymes but does not repeat. Well, in finance, it does repeat. Stablecoins recreate the same bank-run dynamics that have fueled crises for centuries. Notably, every major economy on earth has converged on the same conclusion: the private issuance of circulating money is too dangerous to tolerate. The consensus was so strong that Milton Friedman and Anna Schwartz wrote in 1986 that “[t]he question of government monopoly of hand-to-hand currency is likely to remain a largely dead issue.” The GENIUS Act ignores that history. By allowing stablecoins to proliferate in a poorly regulated framework and potentially prohibiting a sovereign alternative, the U.S. government is planting the seeds for a future financial crisis.

Gary Gorton is the Frederick Frank Class of 1954 Professor Emeritus of Management and Finance at the Yale School of Management.

Jeffery Zhang is an Assistant Professor at the University of Michigan Law School.