DEBATING DELUSIONALS
doomers can’t even critique correct
Foreword
When I was an MBA back in 2008, Nouriel Roubini was at the time being lauded for having made a series of dire predictions leading into the crisis of 2008. A similar thread comes from Nassim Taleb, a noted swan-fancier, who essentially warns that we are constantly at risk of a "black swan" event disrupting markets.
In a literal sense, this is true. Truly unexpected events can come out of left field; if an undetected comet streaked from the heavens and obliterated the London Metal Exchange in spectacular fashion, I would suggest that commodities markets had likely not priced that in, and there would be massive, unexpected disruption. This is the nature of the black swan: you cannot predict it. If you could, it's not a black swan.
So what can you do, as someone who had to manage an exotic derivatives book with many, to put it politely, unusual risks in it at JPM for a decade (and managed never to have a money-losing year in that run)? Or how do you think about this when running a portfolio of catastrophe risk, the definition of an industry driven by black swans? And what do you do with predictions of incessant doom and gloom by people who have all the right "expert" credentials, assuring us that another 2008 is right around the corner (as they have been since, well, 2008, which itself would be a generational run of being incorrect)?
I ask this because after the passage of the Genius act, you are going to see the usual screaming lunatics out in force claiming that crypto will cause the next great financial crisis. But will it? And if it even could, how would this work?
detractors
Detractors don't make any sense. In fact, a hilarious and cruel twist of fate is that part of why crypto gets away with so much transparently dumb stuff is that its critics are often, somehow, even dumber. If more credible and capable people were policing the space, things like UST or pump dot fun pitching memecoins as an "asset class" would have been laughed out of the room. Instead, we get Rana Foorohar writing wildly uninformed takes.
rana Foorohar
Foorohar's piece is a great example of how to deeply misunderstand something, and then put yourself out as an expert claiming that it will collapse. This often (sadly) gets you taken seriously by the press, because one secret about most journalists is that they don't actually know what they are talking about. They are masters of detecting when people are lying to them in traditional ways (e.g. they stole something and they are claiming they did not), but they are actually uniquely unqualified to detect people like this. Why? Those people genuinely believe what they are saying, and they use complicated language or jargon that seems like they should be experts in the field. In fact, they are not.
“"It is not wisdom but authority that makes a law"”
— HOBBES
If you are a practitioner with deep knowledge and you start taking these claims apart, you're left having to write a piece that is five times as long as the original article to explain how wrong it is, which is why people often simply resort to saying these people are wrong and getting increasingly exasperated with them.
Luckily for you, dear reader, I'm a grouchy former fixed income trader, and this stuff is the kind of stuff I've been thinking about for decades. I'm also now a professor, so it's literally my job to explain this stuff. Buckle up.
STABLECOINS SANITIZE
“causes consumer risk”
First claim in this article, and also, peddled in Washington DC around the Genius and Clarity debate, was that GENIUS makes crypto "safer", and that shall cause cryptocurrency holders to take more risk.
First of all: no.
Genius makes stablecoins, safer.
If you don't believe that, then you believe that money market reform from 2008 was a failure and that government money market funds have been a source of risk in the financial system.
Again, referring back to our previous discussion, Genius basically defines stablecoins as a government money market fund locked inside a payment box. If that is unsafe, then you would have to concede that the entire $7T of government money market funds are unsafe, and more so, you'd have to concede that banks (hundreds of which have failed since the crisis, unlike zero government money market funds) are orders of magnitude less safe.
But that's not the argument you get from these people - they are trying to preserve the current system, where again, hundreds of banks have failed, to avoid moving to a system where zero government money market funds and zero stablecoins within this regulatory framework have ever failed.
transitive tragedies
Second, to say that Genius actually making stablecoins safer makes crypto safer is... well, that's not what the box says.
Nothing about having well-regulated, well-designed stablecoins in a form factor that the state of New York has been regulating since 2018 with no issues means that fartcoin is a solid investment. If anything, it means when people panic and sell fartcoin when it inevitably eventually starts to trend to zero, they have a safe haven based on traditional financial regulation to roll into. In that sense, it is entirely possible that Genius is bad for many speculative crypto assets, as it makes an alternative potentially more compelling.
So this argument is at best confused, and at worst actively malicious. It misunderstands the problem, implies safety in things that are not safe, and implies a lack of safety in things that have proven to be very safe. Exactly as I said, the "expert" gets everything precisely backwards.
WARREN, THE WARDEN
We return to the Biden-era idea of "permissioned innovation", something you would have heard from the Warren-aligned economic acolytes of the time. This is the idea that one should not be allowed to innovate if the government deems it "too risky" or "the wrong time". Interestingly, the time Elizabeth Warren thinks blockchains will be suitable is "never". Here, and showing who she has been talking to, the author literally uses the phrase "I can't imagine a worse moment to encourage financial 'innovation'...".
This, to put it bluntly, is literally state control of the economy. We know that doesn't work. Central planners have no special knowledge about where markets are going. In fact, in the US, given that we don't pay our central planners and anyone good is in the private sector, they almost certainly have less idea about what is going on than markets. But this comes down to a fundamental problem that anyone who has read Hayek understands: the government has to be able to predict the future, and specifically predict it better than everyone else, for them to be making these calls and adding any value.
I will remind you this is the exact same government that created a mortgage bubble and now a likely student loan bubble with their economic planning, and now we are being told the only answer is for them to decide how to allocate capital again. Shockingly, in this case, it would be in exactly the way Elizabeth Warren wants, which is to say transforming America into some bizarro version of the financial Amish where the system of 2011 is sacrosanct and must never be transformed from its perfection - that is a religious belief, not an economic one.
bank runs, bailouts
Argument is truly confusing to me. The author explicitly says "Tether (which has more US Treasury holdings than Germany) must sell T-bills into a down market to cover redemptions" as one of the things she is worried about.
First, let's remember what is in the Genius box: bank deposits, t-bills, and overnight reverse repo secured by treasuries. Thus, if a Genius stablecoin is having a run due to fears about stability or safety, we have to ask: did a bank fail, or is the US Treasury failing?
Those are the two options! That would also likely be killing anyone else who was exposed to the bank (in the former case) or literally the entire US financial system (in the latter case). There's no other options here! Again, the assets that Genius stablecoins can hold are very, very limited. A stablecoin in that framework is just a lockbox filled with other stuff. There's not going to be a crisis of confidence around the stablecoin holding the peg unless there is a crisis of confidence around the stuff in the box holding the peg. It's a container! If you have a box with a bomb in it, you don't blame the box when it goes off, you blame the bomb. And in this case, the bomb is the traditional banking system or the collapse of the dollar.
Thus, if we are having a crisis of confidence there, let me tell you, the stablecoin is going to be the least of your worries!
So let us say we are not, and somehow we just have a stablecoin that needs to liquidate. Maybe the company went bankrupt? Maybe they just want to shut down? Maybe Senator Warren won the presidency in 2028 and everyone is closing their businesses and leaving the country? I will remind you that t-bills are the deepest and most liquid market in the world. My old firm Paxos unwound a $23.5B stablecoin over the course of a few months to liquidate it, and do you know what happened? That's right, nothing. Nothing happened. You totally can shut something like this down and walk away, because there are plenty of buyers for US short-term debt. Again, if there's a problem here, it's going to be much, much bigger than the stablecoin. The stablecoin will be on the receiving end of the problem, not the causing end of it.
TECHNOPHOBIC THEATER
Underneath all of the sections are the underlying assumption that there is something terrifying about Bitcoin, and crypto in general. It's found in places where the author misuses statistical measures (like beta) to make something seem scary, or numerous references to how crypto being unstable will be dangerous because of stablecoins (which are, under Genius, extremely stable). Citation needed, etc. etc.
The punch line beneath all of this is a fear, which the author surfaces once, that banks will buy a bunch of crypto for their balance sheet, it will go to zero (or just drop a lot), and the bank will explode.
Well, I am here to tell you that's very unlikely to happen. One, the capital treatment for crypto is actually exceptionally punitive. Bitcoin, hilariously, is among the safest assets a bank can currently buy, because for the amount of capital you have to hold relative to the volatility of the asset, Bitcoin is one of the least volatile per unit of capital assets a bank can put on its balance sheet (behind only cash at the Fed and t-bills, which have basically zero volatility - funny that the latter would show up in Genius stablecoins, hmm?). But that doesn't stop the author from having a full on hair-pulling shrieking meltdown equivalent moment in the essay about this "fear", which in reality demonstrates an incredibly deep lack of understanding about how regulators have not permitted banks to hold crypto assets as principal in most cases, and even if they did, the capital charges are catastrophically high.
The other part of the fear that is fascinating to me is that there are plenty of other highly volatile things that banks are involved with on a daily basis (source: I was a sell-side derivatives trader at a bank), and yet crypto is uniquely evil despite not even being the most volatile asset class.
This entire article is indicative to me of the cult-like beliefs of the anti-crypto army, repeating their sacred sayings ("Crypto will crash the financial system") without any understanding of facts or causation. It would be like your IT person standing over your computer, waving a chime and holding a candle, chanting prayers in latin in order to fix your machine when it had a blue screen error.
FAIR IS FAIR
Now, you're going to tell me: "Austin, be fair, you can't just pick on one person who clearly either didn't know what they are talking about or was fed bad information by someone", to which I am going to say don't worry, I told you I wouldn't only pick on poor Rana Foorohar, so now let us turn to an equally misguided piece from Amit Seru from Stanford.
Because crypto needs better critics. The intellectual bankruptcy of the arguments against crypto are themselves a huge problem, in that they prevent the space from actually being held accountable. When someone is busy either mis-stating facts or making such wild claims that even Alex Jones would tell them to tone down the rhetoric, they cannot effectively call an industry to account. It would be like challenging the problems with the pharmaceutical industry by starting with YOU ARE ALL LIZARD PEOPLE FROM ALPHA CENTAURI AND SECRETLY CONTROLLING OUR MINDS as your opening volley, in all caps, in comic sans (sorry not sorry, Dan Gilbert). It's disqualifying and also a pattern.
amit seru
credit mythos
Professor Seru asserts in this piece that stablecoins will destroy credit intermediation (without specifics), that tech monopolies will launch stablecoins and force everyone to use them (without having read the bill), and that there is a massive loophole for state level issuers (again, without having read the bill).
So let's start with the most interesting of those, the credit intermediation problem, and then we will descend to the less interesting ones (which are, to be blunt, factual errors).
Credit creation
Traditionally in America, we have believed that the credit creation function of banks is a good thing. I tend to agree with this as a general principle, so long as we are willing to acknowledge two things. The first is that credit creation is effective on average, over time. That is to say we are distributing capital to people who can put it to effective use to engage in economically productive activity. Note: this is not what some specific bureaucrat thinks is economically productive (back to our refutation of "permissioned innovation", as the DMV is not exactly an expert investor), but rather, what the market will tell you is economically productive over time. I'm certainly willing to listen to critiques of markets and discussions of market failures and fixes, but central planning is definitely not the answer, so we're using the market to measure here in some way, with some adjustments. The second is that there's nothing special about banks doing the credit creation. If we had alternative lending platforms, private equity, or some other vehicle that could equally extend credit to worthy borrowers, then my answer to that is simple: great! Banks are not sacrosanct. They do not have some special intellectual monopoly on credit. In fact, basically the entire private credit space in the United States exists completely outside of banks right now, and I'm also saying this after having personally run major trading desks at what is probably the best run bank in the entire world (that being JP Morgan).
So with that, we come to the critique that stablecoins will, essentially, kill credit creation, and thus kill the economy. First, this is a horrible misunderstanding of funding markets. As I said, much of lending is already moving out of banks (anyone heard of Lending Club or Apollo?), and over 50% of banks by balance sheet in the United States are heavily involved in the repo market (JPM, Citi, BofA, WF, State Street, BNY, PNC, etc.). Please note that one of the most common instruments underneath stablecoins are reverse repo, which means the repo borrower is on the other side, which means (hilariously), this critique is mad that stablecoins are providing repo funding with collateral instead of deposit funding with no collateral, and this makes the economy less safe?
Listen, I'm merely someone who has been a professor at two of the top business schools in the world, but I'm going to suggest it is uncontroversial to say that collateralized lending is generally considered less risky than uncollateralized lending, and that moving the market over time to collateralized vs. uncollateralized is unlikely to be a massive credit crunch. Instead, it will shift incentives and value within the lending space, and there will be winners and losers, but if saying collateral means that lending can't happen, the entire mortgage market could not and should not exist. It's right there! We can see it! It's HUGE.
This is an incoherent non-objection without some much deeper analysis.
tech-illiterate
So, listen, I don't have an easy way to say this, but I'm pretty sure professor Seru didn't actually read the bill (as the other option is that he's not literate).
If he had, he would have noticed the part of the bill that explicitly bans exactly the thing that he is worried about:
"(B) PROHIBITION-
(i) IN GENERAL.---A public company that is not predominantly engaged in 1 or more financial activities, and its wholly or majority owned subsidiaries or affiliates, may not issue a payment stablecoin unless the public company obtains a unanimous vote of the Stablecoin Certification Review Committee finding that---"
So, that's pretty clear. The SCRC includes all the major banking regulators, and while predominantly engaged in 1 or more financial activities certainly does mean that all of the banks, asset management companies, trust companies, and payments companies can issue stablecoins, you know who is not captured in that definition?
Wal-Mart. Meta. Apple. Exactly the people that are raised as "going to launch a stablecoin", to which my answer is: how?! Do you think the Fed is going to vote yes to this? They won't even approve Custodia on account of them being a very, very slightly different bank than the type of bank they like, but your theory is they are just going to be like "Yeah Amazon is fine".
If you want to understand why I cracked the Alex Jones joke above, things like this are why. The chain of conspiracy theory level events required to get from "Custodia is out but Netflix is in" is just so far afield I'm not sure how we handle this other than making fun of it.
Secondly, even if you do manage to get exceptional approval, did you keep reading for the rest? You know, the data segregation, anti-tying provisions, and inability to use any of the info to target, and that if you do, you're going to attract the DoJ bat and likely have your entity broken up on anti-trust grounds as you've basically just handed them a roadmap?
I might go so far as to say this section is a trap. If you're at a big tech company and reading this, let me give you some political advice: if you launch a stablecoin, somehow get exceptional approval, and then even one employee at your sprawling firm does one thing that they shouldn't, on purpose or by accident, the DoJ is 100% going to use this as a pretext down the road to break your company up and will point to you violating this law in court as the reason. It's a honeypot to catch you. Consider yourselves warned.
overindexing Loopholes
The state level loophole argument is even more absurd. If you (again) had taken the time to read the bill, you would notice that stablecoin issuers can only use a state-level pathway below $10B (so by definition, not material to the market) and if that pathway is materially similar to the federal one. If it's not, the Feds have levers to step in!
But, again, having actually read the bill undermines the ability to fearmonger breathlessly, so instead it appears the reading step was skipped in favor of implying that somehow tiny stablecoin issuers in slightly different frameworks are a terrifying prospect for the nation, which also implies that every single state-level bank below the OCC charter threshold should be wound down, given they are even more dangerous and more divergent?
I'm pretty sure people are not thinking these arguments through.
Congressional Fumble
Even Congress is not immune from getting in on this act. Sean Casten, a representative in the House, also got in on the act with a series of misunderstandings or outright falsehoods that are, unfortunately, pretty representative of the current level of understanding for many in politics.
One objection raised is that blockchain ledgers do not meet audit standards because you can "hop" between blockchains. This is a rather curious objection with regard to stablecoins or tokenized real-world assets in particular, given that every single time you move your assets, you hop between bank ledgers, and if this hopping without a consolidated audit trail (which banks do not have between them, hence the need for SARs and extensive record keeping) is the thing that is impermissible, then boy do I have news for you about the legality of our literal current banking system (and it's not good news).
Two is that you can't actually hop tokens between blockchains in the case of tokens with legal rights. Could I bridge a JPM-issued bank deposit token to another chain? Well, I mean, in a literal sense, yes I could lock a token on one side of a third-party bridge and have a representative token trade on the other side... maybe. I say maybe, because JPM would be under no obligation to honor redemptions of the other token, might not even honor redemption of tokens passing from the bridge, or more likely with an unauthorized bridging of an asset with controls, just freeze the bridge contract right at the outset (bad news for the people who thought they could bridge it). Put simply: this is a trivially solvable problem, and the fact that Casten raises it is a bit like the child's "gotcha" of "oh yeah, well how do you reach the cookies up there on that shelf" to an adult with a ladder. As an aside, none of this has anything to do with GAAP accounting, either, and it's confusing that was even brought up other than to create a sense of experty-ness by using an acronym that means something in another context (a bit like beta was used in the other article).
Casten then also piles in with one of the other pervasive problems from the previous SEC regime, repeating the line of "if you offer something to the public with an expectation of profit that you will manage..." and here I have to stop you and point out that, taken literally, guidance from the previous SEC means that someone who planted trees that are later cut down and used for lumber is apparently involved in a securities transaction because they are the issuer of the tree? The problem is "manage" was tortured beyond recognition, and instead transmuted into "every was involved with even tangentially", which is not what "managed" means any more than the TCP/IP protocol "manages" the contents of your email or your web browser "manages" your bank account because you logged in on the webpage.
Nobody should be opposed to disclosure regimes and protecting folks against abusive trading, but the regulations were also promulgated by a guy who thought tokenizing a literal pokemon card made it into a security (someone explain to me how Pikachu is going to fill out a 10-K please), so the idea that somehow passing legislation around stablecoins or the clarity act is a repudiation of securities law when securities law apparently means that fictional creatures are securities issuers is... weird.
Casten also raises the trope of Trump's family having crypto projects somehow being disqualifying for laws. Let me say that again: laws mandating disclosure apparently cause corruption? My dude, you just argued two paragraphs up in your tweet thread that laws mandating disclosure are a good thing that reduce corruption, and now here you are arguing the exact reverse less than a minute later. You cannot have it both ways. Also, if disclosure increases corruption, you're ready to repeal Dodd-Frank and Sarbanes-Oxley right?
The other really bizarre point here is Casten's belief that somehow Genius causes stablecoins to be less safe? I'm going to go back to a point I have made previously: if you believe that not having money in an FDIC-insured account means that it is fundamentally unsafe and should never be used, and you have not been freaking out about the $7T money market fund industry, you are a hypocrite. There is nothing unique to crypto with these structures, but also in the case of government money market funds, I have to really ask why a bank account partially insured by the US Treasury is more safe than a very short-dated debt instrument fully guaranteed by the US Treasury. So we are saying indirect partial insurance is safer than direct complete insurance?
This is obviously a violation of some very basic core economic principles, and again, represents either a deep lack of understanding of the system or deliberate dishonesty. A box filled only with t-bills or treasury collateral is strictly safer than any bank account, ever. The only way we could do better was to demand that stablecoins only hold reserves at the Federal Reserve (a literal narrow bank)!
In the same paragraph, he also (falsely) claims that Genius allows stablecoins to have crypto as collateral - again, this is a literacy issue. It does not. Your staff need to read these things before handing you talking points to write about them, if you are a member of Congress. Grossly misstating factual elements of legislation as the basis of why you voted on them is pretty disqualifying behavior if you are going to be entrusted with that responsibility. He then manages to follow up by blaming this for the Circle de-peg when, hilariously, it was those partially insured bank accounts that he just called safe one paragraph above that caused the collapse of USDC's value because, again, it's a highly levered institution doing lending and Circle's balance there was only partially (barely, in their case) insured.
So here, I specifically get to dunk on this argument and Representative Casten, who continues to grossly misunderstand stablecoins: there was a $23B stablecoin at the time SVB failed that had zero peg stability issues despite banking at two of the three banks that collapsed (Silvergate and Signature). That was BUSD. Do you know why? I built that. The reserves were mostly in treasury collateral, the bank deposits were privately insured, and we kept it very lean so we had little exposure to the thing that was actually dangerous: banks.
It is the literal exact opposite of what Casten argues is safe here.
Again, we did the exact opposite of what he claims was safe.
USDC
Price series for that time period of USDC (using banks, as he demands)
Bank deposits are riskier than t-bills, and the banks are what caused USDC to depeg (remember, it was their balance at SVB when SVB failed that everyone was scared of - USDC did not cause SVB, SVB caused the USDC issue).
BUSD
Price series for that time period of BUSD (again, using banks)
Notice that BUSD, in a lot of secondary markets, recovers immediately after a ~1% dip when people realize it's not at risk and then hilariously trades above $1 persistently as people flee to the safety of treasuries and away from risky bank deposits.
Again, the secondary market data tells you the exact opposite story that Representative Casten is trying to tell here. This isn't a matter of opinion: it is just wrong.
He also refers to tokenization as "crypto-speak for creating a digital certificate that confers no ownership in an equity but is priced at the same level... in theory."
So first of all, is this dude aware he just accused JP Morgan, Goldman Sachs, Franklin Templeton, and Wisdom Tree of fraud? I'm going to guess no. But as someone who has been following the space and working in RWA, there are tokenization efforts that range from incredibly half-assed all the way to far, far better and cheaper than the current ledger system. I even wrote a paper about why this might be the case with Tuongvy Le (fmr. SEC). I'm going to guess nobody who wrote this tweet thread read that either, because they couldn't even be bothered to read the bill they are working on.
Yet more so, again, if your issue is that the shallow end of the pool is screwing things up, your answer is to... refuse to regulate things so there are no standards? Make it make sense! The whole purpose of regulation is to prevent this sort of conduct and force people to do the right thing. In Franklin Templeton's tokenized MMF, the share ledger is the blockchain and there are multiple layers of controls around it and the SEC approved that, but also tokenization confers no ownership interest according to Casten. This is insane circular talk that assumes a conclusion and then denies that rules improve conduct. I don't know how many times it has to be pointed out to demonstrate that this is intellectually bankrupt behavior, but here it is yet again: prominent Democrats in the House believe that regulation increases corruption and decreases market clarity, yet also support Dodd-Frank.
So listen man: do you not understand, or are you pro-crime?
moving forward
Continued platforming of conspiracy theorist-level cranks as blockchain critics has been a severe negative for both the US economy, financial market structure, and interestingly, crypto itself. Why do I say that? There are plenty of valid critiques of crypto market structure, stablecoins, and tokens, but almost none of them are the critiques raised above. It's the equivalent of having someone correctly pointing out that leaded gasoline is probably not a great thing while then having a chorus of people screaming that electricity makes the frogs gay and that the people claiming they had problems with the traditional financial system are crisis actors and that people who are being debanked are just faking it and debanking is not real completely drowning out the message and having public discourse become something that even the scriptwriters of Idiocracy would reject as being too on the nose.
Where this leaves us is simple: there are many valid questions around how to handle tokenized assets on blockchains, and almost none of them are actually being asked by people, so if Democrats want to critique legislation for not being comprehensive or effective enough, it's curious they are not actually taking the time to determine what that would be and then proposing effective controls.
For instance, I've been working in this space for nearly a decade, and just off the top of my head with zero research, I could raise all of the following as areas where deep critiques are possible and far too little has been said:
Separation of custody and trading/exchange operations for all centralized exchanges.
Blockchain governance structure and token recovery policies for any tokenized asset issuers (stablecoins or otherwise).
AML/KYC information sharing requirements so there can be an industry utility coordinating actions against genuine bad actors, rather than the kabuki theater of the current financial system that catches <1% of all financial crime (also, remember that for anyone who defends the current system as a good option!).
Definitions of legal control for tokens, as well as the liability at various points in transactions.
Market structure proposals for eliminating counterparty credit risk and rules around decentralized clearing and settlement operations.
Do any of those things exist in the critiques of crypto? Rarely, if at all. Instead, most critics are still freaking out about the fact that stablecoins can hold t-bills instead of using bank deposits or saying that Satoshi will come back and delete all the bitcoins.
It is disgraceful.
Please. Identify the people worth listening to.
