A lengthy, very aggressively polemical, but quite clear article appearing July 28 on the China-U.S. Focus site in Hong Kong and titled, “The GENIUS Act and America’s Engineered Instability”, examined how China may be viewing the Trump Administration’s big experiment with crypto coins as the savior of the U.S. Treasury market. The article is by one Warwick Powell, who teaches at Queensland University of Technology in Australia and is a senior fellow of the Taihe Institute. The piece makes two main points, each at length and in detail.
First: The big tech, corporate conglomerate and perhaps the bank issuers of stablecoins will quickly create a new cauldron of the kind of high-risk speculation which piled onto mortgage-backed securities and their derivatives two decades ago. The stablecoins backed, to whatever degree, by Treasuries, will be used not only to buy more Treasuries; rather, the “speculative loop” will also include issuing “synthetic products”—such as yield derivatives, betting on the interest rates which stablecoin issuers are not allowed to pay directly!—or other types of derivatives. (The GENIUS Act explicitly contemplates one such, of many—using the Treasury assets, which already back the stablecoins, to back derivatives bets in the repo market. This is “rehypothecation,” banned by U.S. regulation since the 2009 Dodd-Frank Act, but permitted by UK regulation, and now by GENIUS.)
