The first thing you should know about stablecoins is that they are neither stable nor coins. Once you understand how misleading the label is, many things become clearer—including the risks they pose to the financial system.
Those risks are on flagrant display in the immodestly named GENIUS Act passed by the U.S. Congress in July. The GENIUS legislation (short, in case you were wondering, for “Guiding and Establishing National Innovation for U.S. Stablecoins”) goes to extraordinary lengths to establish a fertile landscape for this new form of money.
Crypto promoters are cheering. The rest of us, though, should ask if the supposed advantages of stablecoins justify the potential dangers to global financial stability.
The oversight problem
Like bitcoin or ethereum, stablecoins are crypto tokens that trade on a public blockchain. Where stablecoins differ from bitcoin and similar cryptocurrencies is that their values aren’t entirely a matter of conjecture. They are tethered—in theory, at least—to underlying assets. Depending on the design of the stablecoin, these underlying assets can be anything from U.S. dollars to other cryptocurrencies.
Promoters claim that the link between the token and the underlying assets firmly anchors the value of a stablecoin. The GENIUS Act, for instance, requires issuers to hold a dollar of liquid assets—such as U.S. Treasuries—for every $1 stablecoin they distribute.
This sounds promising. What promoters don’t like to stress, though, is that the system still hinges upon the assumption that stablecoin issuers will be both honest and competent in managing their coins. Some past stablecoins, such as Terra and BitUSD, have crashed spectacularly, suggesting you might want to be very, very cautious about assuming either attribute.
You might think the risks are justfied if stablecoins deliver big benefits. The problem, though, is that it’s not clear what those benefits might be.
To be fair, the GENIUS Act does take a stab at establishing a regulatory system for U.S. stablecoins. However, it’s not clear how effective its rules will be in rooting out bad or incompetent actors among what could be hundreds or even thousands of competing coin issuers. Regulators will have to be hyper-vigilant to prevent unscrupulous players from distributing more coins than underlying collateral.
Even then, it’s not clear how sturdy a stablecoin system will be in times of stress. What happens, for instance, if a hacker breaks into a stablecoin ledger? Or if a stablecoin issuer runs into financial difficulties? Or if the bank holding the stablecoin’s asset goes bust and its accounts are frozen? These are significant risks.
Undefined benefits
You might think the risks are justified if stablecoins can deliver big benefits. The problem, though, is that it’s not clear what those benefits might be. For most law-abiding people in developed countries, stablecoins are next to useless. Why would you buy a stablecoin when you can just buy the underlying asset directly? If it’s U.S. dollars you want to send or receive, you can do so through the traditional banking system.
The most plausible case for stablecoins occurs if you want to send money quickly across international borders. This is an area where banks don’t shine. They often take days to process international transactions, especially when money is being sent to a less developed nation. Stablecoins can do the same thing faster.
However, stablecoins’ speed in this regard is a dubious virtue. The plodding pace of international bank transactions is largely a reflection of the regulatory hurdles that banks have to clear, especially with cross-border money transfers. If stablecoins can accomplish international transfers more quickly, it’s because they’re not observing those same regulations. And that opens the door to all sorts of bad things.
“Stablecoins have significant shortcomings when it comes to promoting the integrity of the financial system,” the Bank for International Settlements warned in a stinging critique of stablecoins within its 2025 annual report. Among other issues, the coins can help criminals launder money and avoid sanctions.
There are other problems, too. The BIS warned that different stablecoins will have different designs and different backers, so they may well trade at different prices even if they are linked to identical assets. Two coins both tied to the U.S. dollar, for instance, might differ in price depending on the quality of their management or their collateral.
When a dollar isn’t a dollar
To Barry Eichengreen, the prominent economic historian at the University of California, Berkeley, the current enthusiasm for stablecoins evokes memories of the free banking era in the United States. From 1837 to 1864, individual U.S. banks were allowed to issue their own dollars as long as they held $1 in collateral for every $1 issued. The result was financial chaos. Shopkeepers would reject some dollars and accept others only at a discount, based upon their confidence—or lack thereof—in the issuing institution.
Widespread use of stablecoins could create a similar environment, one where a dollar isn’t necessarily a dollar. Judging from the U.S. free banking experience, such a system would be prone to economic contagion, Eichengreen warns. If one stablecoin began to plummet in value, others might follow suit in a mass panic.
If regulators didn’t intervene, stablecoin issuers would have to start selling off their collateral—probably Treasury securities—to satisfy coin holders who wanted to cash out. That, in turn, could send interest rates soaring higher and destabilize the broader economy. The repercussions would be felt not just in the U.S., but around the world.
So why has Congress come out so strongly in favour of stablecoins? It probably has something to do with the crypto industry’s generous backing of pro-crypto candidates. But that’s a poor reason to undermine a financial system. Just because something has “stable” in its name doesn’t mean it’s problem-free.
Ian McGugan writes about markets and economics. His work has appeared in the Globe and Mail, the New York Times and Bloomberg/BusinessWeek. He was founding editor of MoneySense magazine.
Please visit here to see information about our standards of journalistic excellence.