Suddenly, it felt like we were seeing the shadow of 2008. Last week, when I read that JPMorgan was considering lending against customers' held cryptocurrencies, my heart grew heavy, though we all know the day cryptocurrencies enter the real economy is inevitable.
Bit, a digital asset that banks might use as collateral, has been nearly four times as volatile as major indices since 2020. It is also associated with terrorism financing, and I have yet to read anything that makes me believe it is more than a tool for speculators and criminals. But when it has the largest political sponsors behind it, this almost doesn't matter.
Over the past few years, cryptocurrency political action committees have spent millions of dollars, donating not only to Republican politicians but also to many Democrats. This effort culminated a few weeks ago with the passage of the Genius Act. Legislation covering other crypto assets is expected later this year. I predict this will not only lead to the next financial crisis but will further fuel American populism and political turmoil.
This reminds one of 2000, when derivatives advocates flocked to Washington, requesting proper "regulation" so they could bring financial "innovation" to the world. The result was the over-the-counter derivatives market growing sevenfold under insufficient regulation, ultimately leading to the 2008 financial crisis.
Consider now that Treasury Secretary Scott Tessent anticipates the stablecoin market will grow tenfold in the coming years, expanding from a near $200 billion industry to $2 trillion, penetrating everything from loan underwriting to government bond markets.
As senior Senate Banking Committee member Elizabeth Warren told me last week: "We've seen this movie before," with lobbyists saying "please regulate us" because they want the government's golden label of "safe" investment, while politicians provide bipartisan support for deregulation.
Indeed, you can clearly trace this back to the 2000 derivatives deregulation, the broader Clinton-era deregulation that weakened barriers between trading and lending, to the 2018 weakening of Dodd-Frank for regional banks (which facilitated the 2023 banking crisis), and now the Genius Act. All of this has been driven by both parties.
Warren, elected because voters felt betrayed by mainstream politicians, tried to persuade Democrats not to support the Republican Genius Act but was unsuccessful.
But money talks, and the cryptocurrency lobby has shown massive influence by spending $40 million to defeat critics like former Ohio Senate Banking Committee Chair Sherrod Brown. Although nearly two-thirds of Senate Democrats voted against the Genius Act, supporters—including influential Democratic senators like Mark Warner from Virginia and Kirsten Gillibrand from New York—were enough to pass the act.
This gives me four reasons for concern.
First, the Genius Act (like the 2000 Commodity Futures Modernization Act) was promoted as a way to make cryptocurrencies safer, with stablecoins backed one-to-one by the dollar.
But this doesn't make an inherently volatile asset class less volatile. In fact, it might only make the entire market more volatile. Advocates discuss Bit and other cryptocurrencies as hedging tools for traditional markets, but in reality, Bit is a "high-beta" investment, meaning it's highly correlated with the stock market. This means gains and losses are amplified relative to S&P returns. Any beta over one indicates higher market volatility. A recent Fidelity report found Bit's three-year rolling beta at 2.6.
Second, I believe encouraging financial "innovation" is worse-timed than ever, given such uncertain market, economic, and monetary policy conditions.
Imagine if the Fed must significantly raise rates in the coming months or years to combat inflation, causing market crashes as always happens when rates rise. Cryptocurrencies would fall even deeper and faster. Financial institutions holding cryptocurrencies (including many shadow banks) might find themselves in trouble, leading to a credit market freeze.
Suddenly, we'd feel like we're seeing the shadow of 2008 again. This brings me to my third concern. Genius Act supporters claim it will support the dollar and U.S. government bond market. But it's easy to imagine cryptocurrency companies like Tether (which holds more U.S. bonds than Germany) having to sell bonds in a depressed market to cover redemption losses. Then you'd see bonds being dumped, borrowing costs rising, and another catastrophic situation where ordinary people would face pressure to bail out speculators.
But this time, it happens after decades of growing political skepticism. This also brings me to my final concern. The financial deregulation pushed by the Clinton administration in the late 1990s set the stage for the 2008 financial crisis and the Democratic Party losing working-class support. This, in turn, paved the way for Trump's rise.
Trump is now laying the groundwork for our next financial crisis by supporting (and of course, trading) cryptocurrencies. What happens when we fall into financial chaos, voter skepticism of mainstream politics deepens, and the government's interest and ability to buffer economic recession weakens? There will be no cryptocurrencies, and no stability.
