U.S. Crypto Assets Legislation: Concerns Behind the Prosperity

Recently, the United States passed an important digital currency bill, the "GENIUS Act," while the "CLARITY Act" has also been approved by the House of Representatives. These initiatives seem to indicate that the U.S. is poised to become a major hub for Crypto Assets activities, and it may even become the "Crypto Capital of the World." However, supporters of these new bills need to act cautiously to avoid unintended consequences.

What is concerning is that the encryption industry has accumulated significant political influence, primarily through political donations. This has led to the design of the GENIUS Act and the CLARITY Act aimed at obstructing reasonable regulation. This practice is likely to trigger an unprecedented cycle of boom and bust.

Historically, the main advantage of the US financial markets compared to other countries has been their higher transparency, which allows investors to better understand risks and make informed decisions. The US has also established strict conflict of interest regulations that require fair treatment of investors and limit the risks that financial companies can take on.

This regulatory framework was not formed by chance, but is the result of wise laws and regulations established after the Great Depression in the 1930s, and has continued to evolve since then. These rules are a major reason for the friendly business environment, active innovation, and ease of financing in the United States.

Although individual entrepreneurs or emerging industries may be dissatisfied with these rules, it must be recognized that the risks brought about by financial innovation affect the entire financial system and not just individual investors. The focus of regulation is to protect the overall interest.

Many major economies, including the United States, have experienced severe financial turmoil and even systemic collapse. The Great Depression, which began with the stock market crash in 1929, is a typical example, destroying the wealth and dreams of millions of Americans. Avoiding the repetition of such disasters has always been an important policy objective.

However, the "GENIUS Act" does not seem to have advanced the achievement of this goal. The Act creates a framework for the issuance of stablecoins by U.S. and foreign companies. Stablecoins are an important emerging digital asset designed to maintain a stable value against a specific currency or commodity (often the U.S. dollar). They are very useful in cryptocurrency trading, allowing investors to enter and exit specific crypto assets without going through the traditional financial system.

The business model of stablecoin issuers is similar to that of banks: they earn interest rate spreads by investing reserves. According to the new regulations, stablecoins do not pay interest, which gives issuers the incentive to invest part of their reserves in high-risk assets for higher returns. This could become a major source of vulnerability, especially when issuers are licensed by lax state-level agencies.

The main flaw of the "GENIUS Act" lies in its failure to effectively address the inherent run risks of stablecoins, as it prevents regulators from establishing robust capital, liquidity, and other safeguards. When any stablecoin issuer is in trouble, how can we prevent the problem from spilling over into the real economy?

It is worth noting that the bill allows foreign issuers to invest reserves in domestic high-risk government debt and other non-dollar-denominated assets. This could lead to so-called "stablecoins" bearing dollar repayment obligations, while their reserve assets are largely composed of non-dollar assets. If the dollar were to appreciate significantly, it would trigger a severe liquidity crisis and questions about solvency.

If the Senate passes any version of the CLARITY Act, the situation could become even more severe. This legislation may condone unprecedented conflicts of interest and self-serving transactions since the 1920s. More concerning is that these bills could facilitate the continued use of stablecoins and even broader Crypto Assets in illegal financial transactions.

Although the United States may become the global center for Crypto Assets, the rush of Congress to cater to the demands of the Crypto Assets industry poses a real risk of a financial panic repeating itself, both in the U.S. and around the world. This could trigger severe economic damage, leading to massive unemployment and wealth evaporation. We must carefully weigh the balance between innovation and stability to ensure the long-term healthy development of the financial system.