Tech giants becoming banks: Is a financial crisis unfolding in slow motion?

Source: Wall Street Watch "Slow Motion Car Crash" - Will Tech Giants Transform into Banks?

The U.S. Senate is advancing the first-ever cryptocurrency bill, named the "Stablecoin Uniform Standards Protection Act" (GENIUS), aimed at establishing a unified federal standard for the issuance and operation of "payment stablecoins."

What worries the industry the most is that the GENIUS Act will effectively allow tech giants to enter the banking sector without adequate regulation.

Hilary Allen, a law professor at an American university who previously participated in a congressional committee investigating the causes of the 2008 financial crisis, said:

What makes me most uneasy is that this bill will essentially allow the largest tech platforms to function as equivalents of banks. The last crisis was caused by financial institutions that were 'too big to fail', yet the scale of some tech platforms makes those (financial institutions) look small in comparison.

According to reports, the bill imposes almost no restrictions on tech giants like Meta, Amazon, and Google issuing their own stablecoins. Currently, Meta is relaunching its blockchain initiatives, exploring the construction of a payment infrastructure based on stablecoins, with the intention of deeply integrating digital currency into its platform ecosystem.

The risks of stablecoins are strikingly similar to the 2008 financial crisis

Supporters believe that if stablecoins have 100% cash reserves backing them, there will be no bank runs. But Allen points out that this idea is based on "absurdly optimistic assumptions." She said, "Money market mutual funds are structurally almost the same," and they are not immune to the panic that can trigger bank runs.

Money market mutual funds experienced bailouts during the runs in 2008 and 2020, so I believe that a stablecoin run is quite likely to occur.

In fact, back in 2023, when Silicon Valley Bank (SVB) collapsed, the U.S. government had to bail out some kind of stablecoin — the bank held more than $3 billion in USDC reserves as part of its large number of uninsured deposits. Allen warns:

We may find ourselves in a position where we essentially have to rescue these large tech platforms.

She referred to the GENIUS Act as a "slow-motion car crash."

Consumer protection regulation is nominal

Eswar Prasad, a professor of international trade at Cornell University and author of the book "The Future of Money," pointed out that the bill lacks adequate measures for consumer protection and for limiting companies from issuing their own stablecoins. He added that:

In addition, the Trump administration's push for cryptocurrencies and its light regulatory stance indicate that any such protections and restrictions will not be strongly enforced.

Despite initial opposition from Democrats to the bill, partly due to concerns about the impact of the Trump family's cryptocurrency holdings, some Democrats ultimately abandoned their opposition. Virginia Senator Mark Warner defended his change of position on Monday, claiming:

Blockchain technology is inevitable; if U.S. lawmakers do not shape it, other countries will.