Picture a bank run so fast it’s over before you blink—billions in deposits vanishing into stablecoins in milliseconds. Not like Silicon Valley Bank or First Republic, where runs unfolded over hours or days. Stablecoins, under proposed laws like GENIUS and STABLE, could turbocharge this chaos, prioritizing stablecoin holders over regular depositors and creating a game theory nightmare: a Prisoner’s Dilemma that incentivizes instant, devastating digital runs. Worse, these laws could inflate bank liabilities while trashing assets, pushing even rock-solid banks into receivership. This isn’t just a policy flaw—it’s a blueprint for bad actors like rogue states, to exploit and profit. Here’s why stablecoins could break the banking system and how to stop it.
The GENIUS and STABLE Acts sound safe: stablecoins must be 100% backed by U.S. Treasuries, and their holders get seniority in bankruptcy—paid before FDIC-insured depositors or other account holders if a bank fails. This makes stablecoins the ultimate safe haven, but it turns dollar deposits into second-class citizens. Why keep your money in a regular account when stablecoins offer better protection and a guaranteed $1 peg? This isn’t fairness—it’s a rigged game.
Here’s the problem: this seniority creates a massive incentive to flee to stablecoins at the first hint of trouble—a tweet, a bad headline, or even a rumor. Unlike traditional deposits, stablecoin transfers are instant, powered by blockchain. A bank could lose 20-50% of its deposits in seconds, dwarfing the $42 billion run that killed SVB in 48 hours. This isn’t just a run—it’s a digital guillotine, slashing liquidity and tanking capital ratios before regulators can act.
This is game theory on steroids: a Prisoner’s Dilemma where self-interest destroys the system. Every depositor faces a choice: stay in a bank account, risking being last in line if the bank fails, or move to stablecoins for seniority and safety. The rational move is to choose stablecoins, especially since transfers are frictionless and instant. But if everyone bolts, the bank’s deposits evaporate, triggering a collapse. Even healthy banks, with no real issues, could be wiped out by panic alone.
Worse, this creates a perverse feedback loop. As deposits flee to stablecoins, banks’ liabilities increase because stablecoins are treated as senior claims. Meanwhile, banks are forced to liquidate assets, loans for homes, cars, businesses, to cover the outflow. These fire sales trash loan values, as buyers know banks are desperate. A $1 trillion deposit shift to stablecoins by 2028 (half of the Treasury’s $2 trillion estimate) could force $1-$2 trillion in loan liquidations, slashing asset values by 10-20% or more. By 2030, Citibank’s $3.7 trillion stablecoin projection could amplify this, gutting loans by 30-50%. The result? Insolvency for even strong banks, as liabilities (stablecoin claims) balloon while assets (loans) crater.
Here’s the terrifying part: this system is ripe for exploitation. Imagine an evil billionaire or a rogue state like North Korea busting out a bank (mafia style), loading it with deposits, and leveraging up on put options betting against the bank’s stock. Then, in seconds, they flip those deposits into stablecoins—perfectly legal, instant, and prioritized in bankruptcy. The bank’s liquidity collapses, its stock tanks, and they cash in big on the puts. Digital bank robbery! No need for hacking or fraud—just exploiting the seniority rules lawmakers created.
This isn’t sci-fi. High-frequency trading and crypto wallets already move billions in microseconds. A coordinated attack could target multiple banks, spreading panic across social media (think X posts gone viral) and triggering a systemic meltdown. Lawmakers, obsessed with “maintaining the peg,” don’t see the unintended consequences: they’re handing bad actors a playbook to break the system.
Lawmakers are fixated on ensuring stablecoins hold their $1 peg, citing failures like FTX. But Tether, the largest stablecoin, has maintained its peg since shifting to safer assets, even without full transparency. The real issue isn’t the peg, it’s the liquidity drain. Sterilizing Treasury reserves (locking them so banks can’t lend against them) and banning hypothecation (preventing banks from borrowing against stablecoins) starves the system of credit. Meanwhile, seniority rules incentivize runs, making stablecoins a weapon, not a currency.
Stablecoins should be digital dollars—treated like regular deposits, not privileged assets. Banks have managed term mismatches (borrowing short, lending long) for decades, using tools like liquidity buffers, overnight repos, and Fed support. The peg can be maintained with proper reserve management, not draconian rules that choke the system.
To avert catastrophe, we need to rethink stablecoin laws now:
Stablecoins could be a game-changer—fast, efficient digital dollars. But GENIUS and STABLE turn them into a systemic threat, creating first-class stablecoin holders and second-class depositors. This Prisoner’s Dilemma incentivizes millisecond bank runs, inflating liabilities, trashing assets, and risking collapse. A $1 trillion deposit drain by 2028 could spark a recession; $3.7 trillion by 2030 could trigger a depression. Worse, bad actors could exploit this to profit from chaos, leaving regulators flat-footed.
Bankers, policymakers, depositors: wake up. Demand equal treatment for stablecoins, rethink these dangerous laws, allow stablecoins into the standard lending processes of banks, and protect our financial system. Share this post, comment your thoughts, and follow me on LinkedIn and X (@Hoganator) for more on the fight to save banking from stablecoin supremacy. The clock is ticking—let’s act before the next run hits.
Read more: Could Proposed Stablecoin Laws Cause Credit Collapse & Depression?
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