It’s “Crypto Week” on Capitol Hill with all sorts of crypto legislation on the docket— including the so-called GENIUS Act that aims to regulate stablecoins.
I’m not sure the GENIUS Act is in fact genius, but it might be a pretty clever given its potential benefit to the Treasury Department and government bond market.
On its surface, the bill aims to provide a formal regulatory framework for anyone who wants to issue stablecoins, i.e. digital assets that are typically pegged to the US dollar to maintain a “stable” value.
But beneath the surface, the GENIUS Act is a way to funnel more money into US government bonds.
I’ve written about this many times before: the US government is hopelessly addicted to irresponsible spending. Multi-trillion-dollar deficits are no longer the exception—they’re the baseline.
And these massive deficits require the Treasury Department to borrow more money from the bond market.
Problem is that some of the biggest buyers of US government debt securities— specifically foreign governments and central banks— are starting to lose their appetite to invest more money in Treasury bonds.
So Uncle Sam is feverishly trying to drum up more lenders.
Enter the GENIUS Act— which requires stablecoins to be backed by “safe” assets, like... US government bonds!
The Treasury Department is probably hoping that some of the crypto wealth tied up in Bitcoin’s latest all time highs will flow into stablecoins... and thus into the US Treasurys backing them.
But if they think this is the silver bullet to fix America’s fiscal mess, they should think again.
Unlike traditional long-term bond buyers who help lock in funding for decades, stablecoin issuers (according to the GENIUS Act) will only be able to buy the shortest term US government debt, like 90-day T-bills.
This means that the Treasury Department will face constant pressure to refinance a major chunk of its debt every few months.
We discuss this in today’s podcast— where we also answered some reader questions about stablecoins.
One reader, for example, asked if stablecoins are a good way to diversify out of the US financial system.
My answer? Not really.
Once the GENIUS Act passes, most of these stablecoins will be issued by US-based companies and regulated by US government agencies. And over time, more and more agencies will likely encroach into the stablecoin industry— the SEC, IRS, Consumer Financial Protection Bureau, Financial Crimes Enforcement Network, etc.
That means if the government wants to restrict, freeze, or confiscate your digital dollars, they won’t even need to break a sweat. It just takes a phone call and a compliance letter.
More importantly, even if the coin maintains its 1:1 dollar peg, it’s still tied to the dollar. And if the dollar loses value due to inflation—which it is and will almost certainly continue to do—then your stablecoin will depreciate right alongside it.
Bottom line— holding a stablecoin doesn’t matter if the underlying currency is unstable. You’re not really diversifying any sovereign or currency risk.
If you're looking for real diversification—something that actually hedges against the US dollar and protects your purchasing power—stablecoins aren't the answer.
Gold, productive assets, other crypto, foreign stocks and financial accounts… those are the tools for genuine financial diversification.
If you want to hear my full thoughts on the GENIUS Act, stablecoins, and the implications to the US Treasury market, listen to this short podcast here.
https://www.youtube.com/watch?v=isApDBrYwp4
You can access the podcast transcript here.