New Crypto Bill Will “Unleash Chaos,” Warns Economist

WALTER ISAACSON, CO-HOST, AMANPOUR AND CO.: Thank you, Bianna. And Professor Barry Eichengreen, welcome to the show.

BARRY EICHENGREEN, PROFESSOR OF ECONOMICS AND POLITICAL SCIENCE, UC BERKELEY: Thank you. Walter.

ISAACSON: The Senate just recently passed something called the Genius Act. It was a bipartisan bill passed overwhelmingly and it would create something called stablecoins, which are a cryptocurrency or digital currency. Could you explain first what a stablecoin really is?

EICHENGREEN: A stablecoin is a cryptocurrency, but it’s a special kind of crypto. The company that issues it – might be a bank, might be a tech company, might be a crypto exchange – promises to keep it pegged one to one to the US dollar. So it –

ISAACSON: So it doesn’t float like Bitcoin does. You don’t have to worry about it going up and down.

EICHENGREEN: Right. It’s supposed to hold its value and the issuer buys and sells it with the intention of keeping that value stable.

ISAACSON: And so companies like Walmart and others could issue stablecoins in order to have financial transactions that don’t have to go through credit cards, is that right?

EICHENGREEN: That’s right. So you could use Walmart coin at Walmart, but conceivably with other retailers. And your neighbor down the street, World Liberty Financial, the Trump Family Crypto Company has a stable coin planned, I think underway. So there could be hundreds or even thousands of these in principle.

ISAACSON: How are they different from something like Tether that already exists?

EICHENGREEN: Well, they would be exactly like Tether, except they would be regulated by our federal government, by the Fed, by the federal Deposit Insurance Corporation, by the comptroller of the currency. So they, they would be given legitimacy, if you will, by the federal government. They would need a license in order to operate.

ISAACSON: And so that would make a more regulated, make it more safe than the sort of free things we have now. Why is that not a good thing?

EICHENGREEN: Well number one, we don’t know how safe. So the the principle is that a company issuing a stablecoin would hold one dollar’s worth of reserves in liquid reliable form for every dollar stablecoin token that it issued. But we’ve –

ISAACSON: By, by that you mean like treasury bills or something?

EICHENGREEN: Treasury bills or something like that. But that’s basically what money market funds do as well. And if you think back to the global financial crisis, to 2008, you’ll remember that important, an important money market fund broke the buck. Its dollar share went down to 97 cents because the bonds it held turned out to be worth less than promised. And you have to think that regulators are gonna be really smart and on the ball to believe that this can’t also happen with stablecoins.

ISAACSON: You your New York Times op ed said it would cause it could cause economic chaos. Explain why you say that, what that chaos would be.

EICHENGREEN: Well, number one, we would have different dollar coins circulating side by side, conceivably all worth different numbers of dollars, different amounts. Some coins would be worth 97 cents, others would be worth 98 cents. So every single –

ISAACSON: Wait, wait I thought they were supposed to be actually pegged to the dollar.

EICHENGREEN: They are supposed to be, but whether that will be the reality or not is a real question. Think back to that money market fund analogy that I gave you before. So Walter’s coin and Barry’s coin could circulate at different values, and you would have to pull out the equivalent of a phone book and check each and every coin, each and every issuer, the value of the backing behind each and every coin to know how much to, to value it at. Economists talk about the singleness of money. That every dollar bill is worth exactly a dollar that would be at risk under this stable coin regime. That’s –

ISAACSON: But wouldn’t it be possible to create a stable coin that actually was pegged to the dollar?

EICHENGREEN: It is possible in principle, the question is, will it be true in practice? So we have decades, centuries of experience with financial regulation. We have to believe that the regulators will be on the ball. They will ensure that every single stablecoin issuer is really holding bank deposits or treasury bills worth a dollar for every dollar stable coin they issue. This has not been true in the past. Tether’s value has fluctuated in response to events in the past. We have to believe that regulators will really know what they’re doing. They certainly haven’t prevented banks from failing in the past, even though that’s their charge.

ISAACSON: Well if they haven’t prevented banks or money market funds occasionally from failing, and we have Silicon Valley Bank, a lot of things. Why is this any different? And this is a pretty good system, but not pitch perfect.

EICHENGREEN: Well, in, in, in the case of banks, we have federal deposit insurance and the premium for that are paid by the banks. The banks pay into a fund, and that fund is then used to make depositors whole in the event that a bank like Silicon Valley Bank in 2023 fails. There’s nothing like that in the Genius Act. So people who hold and use stable coins are gonna be more nervous about their value than bank depositors. They’re gonna run at the first sign of trouble, and that can cause another form of of chaos as the run spills over contagiously from one stable coin to another. And there’s gonna be pressure on the government to bail out stablecoin holders if something goes wrong, just like there was pressure to bail out the big uninsured depositors of Silicon Valley Bank and to bail out the money market funds in 2008. There being no insurance fund that’s gonna, the costs there are gonna fall on you and me, on the taxpayer.

ISAACSON: Well, let’s just talk about the theory of it, if it could be implemented right. The financial system that we have now is really, it seems to me archaic. It hasn’t been disrupted in a very long time. It’s very hard for me to make small transactions digitally to have to put ’em on a visa or a MasterCard. Isn’t that necessary to find some way to have a digital currency?

EICHENGREEN: Well, the transaction you do with your Visa or your MasterCard is a digital transaction after all, it, it, it is settled digitally. It may take a few days before the vendor actually gets his or her funds. If you use your bank account, pay your electric bill once a month, that’s a digital transaction as well. The idea of stable coins –

ISAACSON: But wait, wait, wait. Those are only available to people, privileged people like me and you who have credit cards. What about most Americans who are unbanked? They don’t have credit cards.

EICHENGREEN: Well, most Americans are banked. But – and, and if your credit is bad, you have a debit card, which is also digital instead of a credit card. So there, there may be a little bit of additional convenience here, but for most of us with credit cards, we do pay a fee to use that credit card. The vendor will pay the two, pass the 2% fee onto us. But I’d remind you, you get a package of services from your credit card company, you get fraud protection, you get the option of paying next month rather than this month. So in, in the case of, of a stablecoin, you’ll be able to make a payment all but instantaneously, but you won’t get these other protections against fraud –

ISAACSON: Senator Tim Scott, who’s one of the proponents talks about this being very important for financial inclusion. Isn’t there some advantage to having more and more people to be able to make track transactions like this?

EICHENGREEN: Well, in, in some countries, I think that is the case. We don’t have a big problem of financial inclusion in the United States. There are different figures for how many people don’t have bank accounts, debit cards, and so forth. But many of the people who don’t, don’t want them because they fly under the radar. Especially in this day and age when we have aggressive immigration enforcement. So one use case for stablecoins is remittances, where Western Union will charge six, seven, 8% for someone working in the United States to wire money to family in Mexico. A stablecoin could do that quickly at low cost, but more generally, stable coins are used as on-ramps and off-ramps for buying other crypto. So if you want to use your dollars to buy Bitcoin, easy way is to first buy Tether and park your dollars there and then buy Bitcoin. Stablecoins are used for remittances, as I described, and stablecoins are used for illicit transactions of various sorts, money laundering, tax evasion, and so forth. So there’s another problem we have to worry about. Do we think that your Walmart or your favorite tech company will be able to effectively enforce, know-your-customer and anti-money laundering rules? That’s what the Genius Act assumes.

ISAACSON: So Walmart, let’s say it does something like a Walmart coin and it stands behind it. Why wouldn’t I trust Walmart as much as I might even trust, you know, a, a money market fund to say, okay, I’ll put some stored value into Walmart coins.

EICHENGREEN: I think it’s entirely possible that that will work, but it will – it may start with Walmart, but it won’t end with Walmart. Again, the genius act foresees all kinds of retailers, big retailers like Walmart banks, tech companies and others, all issuing their own stable coins. So it’s certainly possible that a big player in the end, like Walmart or even one of the credit card companies, will end up dominating this space. But do we want our payment system run by Walmart?

ISAACSON: What would happen if the US government decided, well, maybe the Fed should do this. Would that make some sense?

EICHENGREEN: I think that would make a lot of sense. So many countries are, are, are moving down that road providing their publics and their banking systems with a central bank issued stablecoin. It’s called a central bank digital currency. So China has done it, it’s moving down that road and many other countries are emulating its example. There is opposition in the Congress to doing that in the United States. You know, there’s suspicion of the Fed. There’s a long tradition in the United States going back to Andrew Jackson and before deep and abiding suspicion of concentrated financial power, which means the Fed in the US case. So US politicians don’t want a central bank digital currency. They’re left by default, if you will, witho a stablecoin as a way to take advantage of new digital technology. I think a CBDC, a central bank issued stable coin would be a better way to go.

ISAACSON: So suppose other countries, as you say, issue stable coins backed by the Central Bank, whether it’s China as you said, or the UAE or Europe or others. Could those be used in the United States and then would that be a problem if people are using stablecoins from other countries?

EICHENGREEN: Well, at the moment, people are using a number of different national currencies in their cross border transactions. The dollar is of course the big player there, but the Euro is used for, in international trade and foreign investment, the Chinese renminbi to a lesser extent. The greater convenience of using a digital Chinese renminbi might create a, a, a more serious rival to the US dollars. So I think there is a danger of their kind of stealing a march on us.

ISAACSON: X, formerly known as Twitter, is going to launch its own digital currency this year. It has banking licenses or banking transfer ability to do so. Do you think social networks becoming a financial money transfer system is a good idea?

EICHENGREEN: Well, I worry about the way social networks can, are privy to information, other information about users, about you and me, and how they can use that information to their advantage in the banking and financial sphere. But yes, I think there is a high likelihood that not only X but the other big social platforms will move into the stablecoin sphere.

ISAACSON: If that’s the case, is it better to regulate it – whether or not the genius act has it exactly right – but to try to regulate it and say it has to be backed dollar for dollar by a liquid currency like the US treasuries?

EICHENGREEN: I don’t, I don’t think that our government can ignore stablecoins entirely as they’ve pretty much done up until now. But I’d come back and say that I think the the better model is a central bank digital currency. And I think if the Fed issued one that’s the stable coin that the public would gravitate toward. Do we want X to know every detail about our every transaction, which they would if we use their stablecoin, or would we prefer the Fed to be the entity that issues the digital money that we use? For most, most Americans, I think the answer would be the Fed.

ISAACSON: This senate passed bill to create a regulatory framework for stable coins, now goes to the House of Representatives. What do you think the House could do to change it that would make you feel more comfortable with this concept?

EICHENGREEN: There, I don’t think there’s a, a lot that would make me feel more comfortable. Anything they can do to tighten regulatory oversight. For example, there’s a provision in the, the Senate version that permits, quote, small unquote stable coins to be licensed and regulated by state governments. I worry about competition between the states and the capacity of all 50 states to ably regulate stable coins, even small ones below $10 billion of issuance. So that’s an example of something I would eliminate to strengthen regulation. But more generally, I would feel better were there more support for the Federal Reserve issued alternative, which I think would become the dominant stablecoin

ISAACSON: Professor Barry Eichengreen, thank you so much for joining us. Appreciate it.

EICHENGREEN: Thank you, Walter.