“They [stablecoins] can’t be used to make ordinary purchases, and there’s nothing you can do with them that can’t be done more cheaply and more easily with debit cards, Venmo, Zelle, wire transfers, etc.”
Therefore, Krugman questioned why anyone would not just use U.S. dollars instead of using tokens that are “supposedly backed by dollars.”
According to Krugman, stablecoins offer one feature that traditional modes of payment do not: anonymity. The anonymity associated with stablecoin deposits is a “valuable feature” for miscreants looking to commit crimes, from money laundering and extortion to the purchase of illegal drugs, he wrote, adding:
“In other words, the only economic reason for stablecoins is to facilitate criminal activity.”
Before the federal government started printing paper currency, several private and unregulated banks, called antebellum banks, issued their own paper notes to ease daily transactions. Users could exchange these antebellum bank notes for gold or silver at any time. However, according to Krugman, most of these antebellum banks were “wildcat banks” that were set up with the sole purpose of defrauding users, leading to devastating bank runs in the 1930s.
According to Krugman, stablecoins are the modern-day version of antebellum notes, with the only difference being that these currencies served a purpose: filling the role of currency issuers in the absence of federal notes. Therefore, Krugman likens stablecoin issuers to the antebellum banks of the 19th century. He wrote:
“So, like antebellum bank notes, which were privately issued currencies supported by the claim that they were backed by gold and silver, stablecoins are privately issued tokens supported by the claim that they are backed by dollars.”
He went on to write that just as the 2008 financial crisis was triggered by ‘shadow banks’ that “evaded precautionary regulation,” stablecoins are “a new kind of shadow bank.”
Krugman opined that lawmakers who are backing the U.S. stablecoin bill, dubbed the GENIUS Act, have a vested interest in passing the legislation. According to him, some of these lawmakers are “probably” aware of how stablecoins can facilitate crime. However, he added:
“…it’s difficult to get someone to understand something when their campaign contributions and, in some cases, their personal wealth depends on their not understanding it.”
Stablecoin issuers have repeatedly tried to assure users that their tokens are largely backed by U.S. Treasury bills. However, Krugman explained that the practice poses a significant risk to the U.S. economy.
This is because, like a bank run, if there is a rush of users trying to redeem their stablecoins for U.S. dollars at the same time, it would force issuers into a “fire sale” of treasury bills. This, in turn, would raise interest rates and turn into a “run on government debt,” threatening the financial stability of the entire economy. He noted:
“The fundamental point is that the growth and legitimation of stablecoins poses new risks to overall financial stability — all in the name of making it easier for criminals to do their business.”
He concluded that the consideration of the GENIUS Act indicates that Washington, DC, has turned into a town that “if not entirely controlled by the digital Mob, has at least been largely bought and paid for.”
“for a “nobel” winning economist he [Krugman] is remarkably misinformed about the subject matter.”
