Donald Trump is coming off another week of apparent victories in Congress, as his Svengali-like influence continues to charm American lawmakers, almost against their better judgements, it seems. So keen they are to please the master that no ask is too much. It is a grand triumph of partisanship over sense.
This week's débacle involves cryptocurrencies. For whatever reason, Trump favours cryptocurrencies and stablecoins, and this week, he and his loyal followers passed the Guiding and Establishing National Innovation for US Stablecoins Act (an awkward moniker usually reduced to its acronym, GENIUS), and the Digital Asset Market Clarity Act.
For years, the US government has maintained a "hands-off" approach to cryptocurrencies, generally deeming them too risky for Americans and for the country's financial system. But, as usual, Trump knows better.
The MAGA crowd are looking very pleased with themselves over all this, even though most of them probably don't really understand what it all means or how it works. They just have some vague idea that cryptocurrencies are somehow subversive and anti-establishment, and therefore to be supported.
Meanwhile, many of those who DO understand it all, including Transparency International, the Free Russia Federation, the Financial Accountability and Corporate Transparency Coalition (speaking of awkward monikers!), and the Kleptocracy Initiative, are warning that these legislations include some dangerous loopholes for money laundering and sanctions evasion. Maverick countries like Russia, North Korea and Iran love cryptocurrencies, and have turned to them to bypass international sanctions and to move illicit funds. Regularizing crypto and stablecoins, like the USA just did, is only going to help them achieve their nefarious aims.
Anyway, I have a reasonable idea what cryptocurrencies are, but what are stablecoins?
Stablecoins are cryptocurrencies designed to be protected from the usual wild volatility that makes them so unsuitable as digital assets for payment or as a store of value. They do this by maintaining a constant 1:1 exchange rate with the US dollar. They are the (relatively) respectable face of crypto, although arguably they lose some of the other supposed advantages of other crypto currencies in the process.
Stablecoins represent a relatively small part of the overall cryptocurrency market (about $170 billion out of a total of $1.2 trillion), but they have surged in popularity in recent years. The two largest stablecoins are Tether (with a market capitalization of around $80 billion) and USD Coin ($49 billion). Tether, USD Coin and Binance USD are all reserve-backed, i.e. they hold enough dollar-denominated assets to maintain an exchange rate of 1:1. Or at least they say they do - reliable information is not always available.
TerraUSD is a slightly different animal, an algorithmic stablecoin, which supposedly maintains its value through a complex system of swapping with a free-floating cryptocurrency called Luna to control supply (i.e. smoke and mirrors).
This can break down, though. In 2022, TerraUSD crashed when people lost faith in Luna, amid a general downturn in cryptocurrency markets. Tether has also broken away from its dollar peg from time to time, and has suffered period crashes.
The US Federal Reserve warns that, increasingly, stablecoins are being used to facilitate leveraged trading in other cryptocurrencies, and are increasingly being used in international trade (particularly by China and some South American countries) as a way to avoid capital controls. The Fed also warns that stablecoins are vulnerable to investor runs, and can even destabilize the mainstream financial system.
Trump, however, is not worried. He and his family and many of his closest team are deeply invested (literally) in crypto. For now at least, they are making serious hay as their own actions are helping crypto markets to boom. Trump has made an estimated $1 billion on crypto to date, more than any one of his real estate assets. You should probably watch to see when they start to disinvest, though, given that the fox is in charge of the hen-coop.
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