Genius Act could disrupt financial stability, warns economist Barry Eichengreen

The recently enacted Genius Act, signed into law by President Donald Trump permits non-government entities—including banks and companies like Amazon—to issue digital currencies known as payment stablecoins.

CNBC-TV18’s Latha Venkatesh spoke to Barry Eichengreen, Professor of Economics at Berkeley University on Genius Act  who recently published a very critical piece in The New York Times, saying that the Genius Act  will bring 'economic chaos'.

The Genius Act defines stablecoins as “any digital token that is recorded on a cryptographically secured distributed ledger.” Eichengreen highlighted that “it’ll be 18 months until we see the rules,” and warned that “issuers can get around rules. They can bend them, and I worry about their ability to stay one step ahead of the regulators.”

The Act sets out a complex framework where large banks must seek stablecoin-issuing licenses from the Federal Reserve, while smaller banks go to state regulators. Non-bank firms like Amazon or Walmart must approach the Office of the Comptroller of the Currency.

However, non-banks also require unanimous approval from a review committee comprising the Treasury Secretary, Fed Chair, and FDIC Chair.

Eichengreen fears fragmentation: “There will be many different private coins, and no guarantee that they will trade one to one for one another.” This, he noted, threatens the “singleness of money.”

Though stablecoins are to be backed by US Treasuries and comply with AML laws, Eichengreen argued such safeguards are insufficient. “We have seen money market mutual funds in the United States that broke the buck… I think we need to worry about that more generally.”

Eichengreen believes that the rise of stablecoins could pose a serious challenge to monetary sovereignty in countries like India, Indonesia, or the Philippines. Since the vast majority—about 99.5%—of stablecoin circulation is currently in US dollars, their widespread use in domestic markets would effectively lead to dollarisation.

This shift from local currencies to dollar-based transactions could significantly weaken central banks’ ability to conduct effective monetary policy.

In India's case, the Reserve Bank would have reduced control over the rupee and its influence on the broader economy, a phenomenon known as currency substitution, which Eichengreen sees as a growing concern for sovereign nations.

For the entire discussion, watch the accompanying video

Also Read | Genius Act gives legitimacy boost to stablecoins, says Cornell’s Eswar Prasad