Nobel laureate economists reveal the "crisis structure" of "stablecoin legislation"

Written by: Daii

But this time, the person issuing the warning is Simon Johnson—a scholar who just won the Nobel Prize in Economic Sciences in 2024. This means that his views carry enough weight in both academic and policy circles to not be ignored.

Simon Johnson served as the Chief Economist of the International Monetary Fund (IMF) and has long focused on global financial stability, crisis prevention, and institutional reform. In the fields of macro-finance and institutional economics, he is one of the few voices that can influence both academic consensus and policy design.

At the beginning of August this year, he published an article titled "The Crypto Crises Are Coming" on the globally renowned commentary platform Project Syndicate. This platform is known as the "column for global thought leaders" and has long provided articles for over 150 countries and more than 500 media outlets, with authors including political leaders, central bank governors, Nobel laureates, and top scholars. In other words, the views expressed here often reach the global decision-making level.

In the article, Johnson pointed his finger at a series of recent cryptocurrency legislations in the United States, particularly the recently passed GENIUS Act and the advancing CLARITY Act. In his view, these laws superficially aim to establish a regulatory framework for digital assets such as stablecoins, but in reality, they are loosening key constraints under the guise of legislation. (Project Syndicate)

He stated bluntly:

Unfortunately, the crypto industry has acquired so much political power – primarily through political donations – that the GENIUS Act and the CLARITY Act have been designed to prevent reasonable regulation. The result will most likely be a boom-bust cycle of epic proportions.

Translation: Unfortunately, the cryptocurrency industry has gained immense political influence through substantial political donations, to the extent that the original intent of the Genius Act and the Clarity Act was to prevent reasonable regulation. The result is likely to be an unprecedented boom-bust cycle.

At the end of the article, he even gave a cautionary conclusion:

The US may well become the crypto capital of the world and, under its emerging legislative framework, a few rich people will surely get richer. But in its eagerness to do the crypto industry『s bidding, Congress has exposed Americans and the world to the real possibility of the return of financial panics and severe economic damage, implying massive job losses and wealth destruction.

Translation: The United States is likely to become the "crypto capital" of the world, and within this emerging legislative framework, a few wealthy individuals will certainly become even richer. However, the U.S. Congress's eagerness to serve the cryptocurrency industry poses a real possibility of a financial panic resurging, leading to severe economic losses not just in the U.S. but globally, which means large-scale unemployment and wealth evaporation.

So, how exactly is Johnson's argument and logic chain constructed? Why does he come to such a judgment? This is exactly what we are going to analyze next.

1. Is Johnson's warning justified?

Johnson has set the stage: The "GENIUS Act" was officially signed into law on July 18, 2025, while the "CLARITY Act" passed the House of Representatives on July 17 and is awaiting Senate review.

These two bills clearly define at the federal level "what stablecoins are, who can issue them, who regulates them, and within what scope they operate," effectively opening up a regulatory pathway for "larger scale and broader penetration" of cryptocurrency activities. ( Congress website )

Johnson's subsequent risk assessment starts from this "systematic combination punch."

1.1 Interest Spread: The Profit Engine of Stablecoin Issuers

His first step was to grasp the main line of "where does the money come from"—for holders, stablecoins are zero-interest liabilities (holding 1 USDC does not generate interest); while issuers invest reserves into income-generating asset pools to profit from the interest spread. This is not speculation, but a fact clearly written in the terms and financial reports:

The USDC terms state: "Circle may allocate reserves to interest-bearing or other income-generating instruments; these earnings do not belong to the holders." (Circle)

Media and financial disclosures further confirm: Circle's revenue is almost entirely dependent on reserve interest (with nearly all revenue in 2024 coming from this source), and changes in interest rates can significantly affect profitability. This means that as long as regulations allow and do not harm redemption expectations, issuers inherently have the motivation to maximize asset-side returns. (Reuters, Wall Street Journal )

In Johnson's view, this "spread-driven" phenomenon is structural and normalized—when the core of profit comes from term and risk compensation, and the returns are not shared with the holders, the impulse to "chase higher-yielding assets" must rely on rules to pin down the boundaries.

The problem is that the boundaries of these rules themselves are flexible.

1.2 Rules: The devil is in the details.

He immediately analyzed the micro provisions of the "GENIUS Act", pointing out several seemingly technical details that could rewrite system dynamics in times of pressure:

Whitelist-style reserves: Article 4 requires a 1:1 reserve ratio, limited to cash / central bank deposits, guaranteed deposits, U.S. government bonds with a maturity of ≤ 93 days, (reverse) repos, and government money market funds (MMF) that solely invest in the above assets, etc. It appears robust on the surface, but still allows for the existence of certain maturities and repo structures—at times of stress, this may mean that securities must be "sold for cash." ( Congressional Network )

"Not to exceed" regulatory limits: The bill authorizes regulators to set standards for capital, liquidity, and risk management, but explicitly requires that these standards "not exceed the extent necessary to ensure the ongoing operations of the issuer" (do not exceed… sufficient to ensure the ongoing operations). In Johnson's view, this is equivalent to compressing the safety cushion to the "bare minimum" rather than leaving redundancy for extreme situations. ( Congressional Network )

He pointed out that: Normally, a whitelist + minimum requirements make the system more efficient; but in extreme cases, the time difference and price impact of "redemption - monetization" will be amplified by the deadlines and repurchase chains.

1.3 Speed: Bankruptcy measured in minutes

In the third step, he put "time" on the table.

Although the GENIUS Act writes the priority of stablecoin holders in bankruptcy into law and requires courts to strive to issue a distribution order within 14 days, which seems friendly to investors; compared to the on-chain redemption speed of minutes, this is still too slow. ( Congress Website )

Real-world cases confirm this speed mismatch: In March 2023, during the SVB (Silicon Valley Bank) incident, USDC briefly dropped to $0.87–0.88, and it stabilized only by filling the gap and restoring redemptions; research from the New York Fed recorded the patterns of "collective runs" and "flight to safety" in stablecoins in May 2022. In other words, panic and redemptions occur on an hourly basis, while laws and courts operate on a daily basis. (CoinDesk, New York Federal Reserve Bank, Liberty Street Economics)

This is exactly what Johnson referred to as the system's "leverage point": when the asset side must respond to minute-level liability flight through "selling bonds for redemption," any program delay could magnify individual risks into systemic shocks.

1.4 Dark Door: The Favorite Boundary of Profit

He then discussed the cross-border dimension:

The "GENIUS Act" allows foreign issuers to sell in the U.S. under "comparable regulation" and requires maintaining liquidity in the United States, but the Treasury can exempt certain requirements through mutual recognition arrangements. Although the text does not directly state that non-U.S. dollar sovereign debt is investable, Johnson is concerned that "comparable" does not equal "equivalent," and the relaxation of mutual recognition and reserve requirements could lead some reserves to decouple from the dollar, thereby amplifying exchange rate mismatches when the dollar appreciates significantly. ( Congressional Website, Gibson Dunn, Sidley Austin )

At the same time, the bill leaves ample space for qualified state issuers, and federal intervention must meet certain conditions, which provides fertile ground for regulatory arbitrage—issuers will naturally migrate to the jurisdictions with the least regulation. ( Congress website )

The conclusion is: The regulatory puzzle of cross-border and interstate operations, once combined with profit motives, often pushes risks to the softest edges.

1.5 Fatal: No "lender of last resort" and relatively loose political constraints.

In terms of institutional design, the "GENIUS Act" does not establish a "lender of last resort" or insurance safety net mechanism for stablecoins. The bill excludes stablecoins from the definition of commodities, but it also does not include them under the category of insured deposits— to do so, issuers must qualify as insured deposit institutions. As early as 2021, the PWG (President's Working Group on Financial Markets) had suggested that only insured deposit institutions be allowed to issue stablecoins to mitigate the risk of bank runs, but this suggestion was not adopted in the bill. This means that stablecoin issuers lack FDIC (Federal Deposit Insurance Corporation) insurance protection and cannot obtain discount window support during a crisis, highlighting a significant gap compared to the traditional "banking prudential framework." ( Congressional Website, U.S. Department of the Treasury)

What worries Johnson even more is the potential entrenchment of this system gap due to the political and economic background. In recent years, the influence of the crypto industry in Washington has rapidly increased—just the related super PACs, like Fairshake, have raised over $260 million in the 2023-24 election cycle, becoming one of the most vocal financial supporters; the external fundraising scale for congressional elections across the industry has already surpassed the billion-dollar mark. In this context, the "flexible options" in the legal provisions and political motivations may reinforce each other, making the "bare minimum" safety net not only a real choice but also potentially evolve into a long-term norm. (OpenSecrets, Reuters)

1.6 Logic: From Legislation to Depression

Connecting the above steps, we have Johnson's reasoning path:

A. Legislation legitimizes larger-scale stablecoin activities

→ B. Issuer relies on zero-interest liabilities - profit model of interest-bearing assets

→ C. The legal provisions choose the "minimum necessary" in terms of reserve requirements and regulatory standards, while retaining flexibility for arbitrage and mutual recognition.

→ D. During a run on the bank, minute-level redemptions encounter heavenly-level interventions, forcing the selling of bonds for redemption, impacting short-term interest rates and the repo market.

→ E. If foreign currency exposure or the widest regulatory boundaries are superimposed, the risk further amplifies.

→ F. The lack of a final lender and insurance safety net causes individual imbalances to easily evolve into industry volatility.

The persuasiveness of this logic lies in its combination of close reading of legal texts (such as "do not exceed... ongoing operations" and "14-day allocation order") and empirical facts (USDC dropping to 0.87–0.88, the collective redemption of stablecoins in 2022), and it is highly synchronized with the FSB (Financial Stability Board), BIS (Bank for International Settlements), and PWG's focus on "runs and fire sales" since 2021. ( Congressional Network, CoinDesk, Liberty Street Economics, Financial Stability Board )

1.7 Summary

Johnson does not assert that "stablecoins will inevitably trigger a systemic crisis," but rather reminds us that when "interest rate incentives + minimum safety cushion + regulatory arbitrage / mutual recognition flexibility + delayed disposal speed + no LLR (Lender of Last Resort) / insurance" overlap, the system's flexibility may inversely transform into a risk amplifier.

In his view, some institutional choices of "GENIUS/CLARITY" make it easier for these conditions to occur simultaneously, which is why he issued a warning of "prosperity—recession."

The two historical crises related to stablecoins also seem to indirectly validate his concerns.

2. The "Moment of Truth" of Risks

If Johnson's analysis earlier is a "systemic concern," then the real test of the system is the moment the run occurs— the market will not give you a warning, nor will it leave you ample time to react.

Two events in history that are completely different in nature have allowed us to see the "hidden cards" of stablecoins under pressure.

2.1 Liquidity Mechanics

First, let's look at the UST of the "Barbaric Era".

In May 2022, the algorithmic stablecoin UST rapidly lost its peg within days, and the related token LUNA entered a death spiral. The Terra chain was forced to halt temporarily, exchanges delisted the tokens one after another, and the entire system evaporated approximately $40–45 billion in market value within a week, triggering a larger wave of cryptocurrency sell-offs. This is not just a typical price fluctuation, but a classic bank run: when the promise of "stability" relies on the internal burning and confidence cycle of the protocol, rather than on quickly redeemable external high-liquidity assets, once confidence is shattered, the selling pressure amplifies itself until the system completely collapses. ( Reuters, The Guardian, Wikipedia )

Looking at the USDC de-pegging event "before the era of compliance", it reveals how off-chain banking risks can instantly transmit to on-chain.

In March 2023, Circle disclosed that approximately $3.3 billion in reserves were held at Silicon Valley Bank (SVB), which faced an unexpected liquidity crisis. Within 48 hours of the announcement, the price of USDC in the secondary market briefly fell to $0.88, until regulators announced full protection for SVB deposits and launched the Bank Term Funding Program (BTFP) emergency tool, which quickly reversed market expectations and restored the peg.

During the week, Circle reported a net redemption scale of $3.8 billion; third-party statistics show that on-chain destruction and redemption continued to expand over several days, with a single-day redemption peak approaching $740 million. This indicates that even if reserves are mainly directed towards high liquidity assets, as long as the 'redemption path' or 'bank custody' is questioned, a run on the bank can ferment within minutes/hours until a clear liquidity backing appears. (Reuters, Investopedia, Circle, Bloomberg.com)

By looking at the two incidents side by side, you will find that the same set of "run on the bank mechanics" has two triggering methods:

UST: The endogenous mechanism is fragile - it relies entirely on expectations and arbitrage cycles without verifiable and quickly liquidatable external asset backing.

USDC: Although there is an external anchor, the off-chain carrying point has become unstable - a single point of failure on the bank side is instantaneously magnified into price and liquidity shocks on-chain.

2.2 Actions and Feedback

The New York Fed team characterized this behavior pattern using the framework of money market funds: stablecoins have a clear "break the $1" threshold, and once it falls below, redemptions and asset swaps accelerate, leading to a flight to "safer stablecoins" from "riskier stablecoins." This explains why when USDC depegs, some funds simultaneously flow towards "Treasury-type" alternatives or those perceived as more stable—migrating rapidly, with a clear direction, and exhibiting self-reinforcing behavior. ( New York Federal Reserve Bank, Liberty Street Economics)

It is worth noting the feedback loop: when on-chain redemptions accelerate and the issuer needs to "sell bonds for redemption," the selling pressure will directly transmit to the short-term government bonds and repo market. The latest BIS working paper using daily data from 2021 to 2025 found that a significant inflow of stablecoin funds can lower the 3-month U.S. Treasury yield by 2-2.5 basis points within 10 days; while the upward yield effect from an equivalent outflow is stronger, 2-3 times that of the former. In other words, the pro-cyclical and counter-cyclical fluctuations of stablecoins have already left a statistically identifiable "fingerprint" on traditional safe assets; once a short-term large redemption at the USDC level occurs, the transmission path of "passive selling - price shock" is indeed present. ( Bank for International Settlements )

2.3 Lessons

The cases of UST and USDC are not coincidental, but rather two structured warnings:

There is no "stability" supported by redeemable external assets; essentially, it is a race against collaborative behavior.

Even with high-quality reserves, the single point vulnerability of the redemption path can be instantaneously amplified on-chain.

The "time lag" between the speed of bank runs and the speed of resolution determines whether it will evolve from a localized risk into a systemic disturbance.

This is also the reason why Johnson discusses "stablecoin legislation" alongside "run mechanics"—if the legislation only provides a minimally adequate safety net without incorporating intraday liquidity, redemption SLA (Service Level Agreement), stress scenarios, and orderly disposal into enforceable mechanisms, then the next "moment of truth" may come even sooner.

So the question is not whether the legislation is wrong, but rather to acknowledge:

Proactive legislation is clearly better than no legislation, but reactive legislation may be the true coming-of-age ceremony for stablecoins.

3. The Coming of Age of Stablecoins - Passive Legislation

If we compare the financial system to a highway, proactive legislation is like drawing guardrails, speed limit signs, and emergency escape lanes before driving; while reactive legislation often appears after an accident, using thicker concrete barriers to fill in the previous gaps.

To explain the "coming of age of stablecoins", the best reference is the history of the stock market.

3.1 The Coming-of-Age Ceremony of Stocks

The U.S. securities market did not initially have a disclosure system, exchange rules, information symmetry, and investor protection. These "guardrails" were almost all put in place only after incidents occurred.

The 1929 stock market crash plunged the Dow Jones index into the abyss, with banks continuously collapsing, reaching a peak of closures by 1933. After this disaster, the United States enacted the Securities Act of 1933 and the Securities Exchange Act of 1934, embedding information disclosure and ongoing regulation into law, and establishing the SEC as a permanent regulatory body. In other words, the maturation of stocks was not achieved through persuasive ideas but rather shaped by crises—its 'coming of age' was the reactive legislation following the crisis. (federalreservehistory.org, Securities and Exchange Commission, guides.loc.gov)

The "Black Monday" of 1987 is another segment of collective memory: the Dow Jones plummeted 22.6% in a single day, after which U.S. exchanges institutionalized the "circuit breaker" mechanism, providing the market with brakes and emergency escape routes. In extreme moments such as 2001, 2008, and 2020, "circuit breakers" became standard tools to suppress panic selling. This is a typical case of passive institutionalization—first comes the severe pain, then the system. (federalreservehistory.org, Schwab Brokerage)

3.2 Stablecoin

Stablecoins are not a "secondary innovation"; rather, they belong to the category of infrastructure-type innovations, just like stocks: stocks transform "ownership" into tradable certificates, reshaping capital formation; stablecoins convert the "fiat cash leg" into programmable, globally available 24/7 settlement digital objects, reshaping payments and clearing. The latest report from the BIS bluntly states that stablecoins have been designed as gateways into the crypto ecosystem, acting as transaction mediums on public chains and gradually deeply coupling with traditional finance—this is already a reality, not just a concept. ( Bank for International Settlements )

This integration of "reality-virtual" is being implemented.

This year, Stripe announced that Shopify merchants can accept USDC payments and choose to automatically settle into their local currency accounts or directly hold it as USDC—on-chain cash legs are directly integrated into merchant ledgers. Visa also explicitly stated on its stablecoin page that stablecoins are positioned as a payment medium of "fiat stability × crypto speed," incorporating tokenization and on-chain finance into the payment network. This means that stablecoins have penetrated the cash flow of the real world, and when cash legs are on-chain, the risks are no longer confined to the crypto circle. (Stripe, Visa Corporate)

3.3 Inevitable Rite of Passage

From a policy perspective, why is the "passive legislation" of stablecoins almost inevitable? Because it has the typical "gray rhino" characteristics:

Significant scale: On-chain stablecoin settlement and activity have become a sidechain of global payments, sufficient to create spillover in the event of a failure.

Coupling enhancement: BIS's measurement shows that significant outflows of stablecoin funds would substantially push up the 3-month U.S. Treasury yield, with the magnitude being 2-3 times that of equivalent inflows, indicating that it has affected the short-end pricing of public safety assets.

The sample has appeared: Two "run samples" of UST and USDC demonstrate that minute-level panic can penetrate both on-chain and off-chain.

This is not a random coincidence of a black swan, but a repeatable mechanics. Once the first large-scale spillover occurs, policies will inevitably thicken the guardrails — just like in 1933/1934 for stocks, and in 1987 for circuit breakers. ( Bank for International Settlements )

Therefore, "passive legislation" is not a denial of innovation; on the contrary, it is a sign that innovation has been socially accepted.

When stablecoins truly bridge the speed of the internet with the accounting unit of central bank currencies, they upgrade from a "tool for insiders" to a "candidate for public settlement layers." Once they enter the public layer, society will demand that they possess organizational and orderly disposal capabilities that are equivalent to, or even exceed, those of money market funds, with stronger rules after incidents.

Circuit Breaker Mechanism (Swing Pricing / Liquidity Fee)

Intraday liquidity red line

Redeem SLA

Cross-border equivalent regulation

Minute-level trigger for bankruptcy priority ranking

These paths are strikingly similar to those taken by the stock market: first, let go and allow efficiency to fully manifest, then use crises to firmly secure the guardrails.

This is not a regression, but a rite of passage for stablecoins.

Conclusion

If the coming-of-age ceremony for stocks took place amidst the blood and turmoil of 1929, embedding the "disclosure-regulation-enforcement" trio into the system; then the coming-of-age ceremony for stablecoins is truly writing the "transparency-redemption-disposal" trio of hard keys into code and law.

None of us want to see the tragic repetition of the crypto crisis again, but the greatest irony of history is that humanity has never truly learned from its lessons.

Innovation is never crowned by slogans, but is achieved through constraints that enable success—verifiable transparency, executable payment commitments, and predictable orderly disposals are the tickets for stablecoins to enter the public settlement layer.

If a crisis is unavoidable, then let it come early, exposing the weaknesses first, so that the system can be repaired in time. This way, prosperity will not end in collapse, nor will innovation be buried in ruins.

Terminology Overview

Redemption is the process by which holders exchange stablecoins for fiat currency or equivalent assets at face value. The speed and path of redemption determine whether one can "survive" during a run.

Reserves / Reserve (Reserves) is the pool of assets (cash, central bank / commercial bank deposits, short-term US Treasury bonds, (reverse) repos, government money market funds, etc.) held by the issuer to guarantee redemption. The composition and maturity determine liquidity resilience.

The spread (Spread) is a zero-interest liability for stablecoin holders; the issuer invests the reserves in interest-bearing assets to earn the spread. The spread drives the natural incentive for "higher yields and longer durations" in allocations.

(Reverse) Repo (Repo/Reverse Repo) is a short-term financing/investment arrangement secured by bonds.

Government Money Market Funds (Government MMF) are money market funds that only hold highly liquid government assets. They are often regarded as a component of "cash equivalents," but may also face redemption pressure during extreme times.

Insured Deposits refer to bank deposits that are covered by deposit insurance (such as FDIC). Deposits from non-bank stablecoin issuers typically do not enjoy the same level of protection.

The Lender of Last Resort (LLR) provides a public backstop for liquidity during a crisis (such as central bank discount windows / special tools). In the absence of this, individual liquidity shocks are more likely to evolve into systemic sell-offs.

Fire Sale refers to a chain reaction of forced rapid asset liquidation that leads to price overshooting, commonly seen in scenarios of bank runs and margin calls.

"Breaking the Buck" refers to an instrument (such as MMF/stablecoins) that is nominally fixed at $1 but experiences a price deviation below par, triggering a chain of redemptions and a flight to safety.

Intraday Liquidity refers to the ability to access / convert cash and cash equivalents within the same trading day. It determines whether "minute-level liabilities" can be matched with "minute-level assets."

A Service Level Agreement (SLA) explicitly commits to redemption speed, limits, and response (such as "T+0 redeemable limit" and "queue processing mechanism"), which helps stabilize expectations.

Orderly Resolution refers to the allocation and liquidation of assets and liabilities according to the plan in the event of default/bankruptcy, avoiding disorderly runs.

Cross-border equivalence/recognition refers to the acknowledgment of the equivalence of regulatory frameworks between different jurisdictions. If "equivalence ≠ equivalence", it may lead to regulatory arbitrage.

Safety cushion / Buffer capital, liquidity, and duration redundancy to absorb pressure and uncertainty. An excessively low "minimum required" will fail in extreme moments.