On July 18, President Donald Trump signed into law the boastfully named GENIUS Act. If the law wreaks havoc on the financial system, as seems highly likely, that name will become a grim joke: What genius thought that letting the cryptocurrency industry write its own rules would be a good idea?

The Guiding and Establishing National Innovation for U.S. Stablecoins Act purports to create a regulatory framework for a type of cryptocurrency called stablecoins. Despite their reassuring name, stablecoins—which promise a constant value relative to real-world currencies, usually the U.S. dollar—are by far the most dangerous form of cryptocurrency. Their danger lies in the way they are meant to be safe.

Most people understand that cryptocurrencies are volatile and speculative. Bitcoin, ether, and other name-brand cryptocurrencies fluctuate in value day by day, year by year. Stablecoins are meant to do away with these fluctuations, yet they pose what may be a larger threat to the wider financial system. The GENIUS Act, like the Markets in Crypto-Assets regulation adopted by the European Union in 2023, offers safeguards that will likely enlarge the stablecoin market considerably. If—or when—the coins explode, the GENIUS Act more or less ensures that the U.S. government will have to bail out the stablecoin issuers and their holders on a scale of hundreds of billions of dollars.

This time it’s different. In finance, those words are almost always ominous. In the early 2000s, the financial world claimed that by bundling subprime mortgages into bonds, many of them rated triple-A, it had invented a new kind of risk-free asset. But risk always carries a price. Pretending a high-risk asset is low-risk allows manipulators to pocket the benefits of this gamble for themselves. In 2007, when the supposedly triple-A subprime bonds went bust, the world plunged into the worst recession since the 1930s. Stablecoins offer the same alchemy—junk into gold—and, very possibly, the same result.

A $100 purchase of stablecoin today should mean $100 in the future, which ideally makes this cryptocurrency a safe place to store digital funds. Stablecoins are meant to offer all the security and liquidity of a bank deposit within the digital architecture of the cryptocurrency system.

Annie Lowrey: The great crypto crash

But such pledges of stability have proved unreliable. In the 11 years they have been around, a number of stablecoin issuers have defaulted, erasing billions of dollars in holdings. Terra, once a top stablecoin issuer, wiped out almost $60 billion of investor assets in May 2022. “Stablecoins, like money-market funds, project security but can collapse under pressure,” the Nobel Prize–winning economist Jean Tirole observed recently.

The GENIUS Act, which is scheduled to take effect by January 2027, offers regulations that are meant to reassure investors by making this cryptocurrency less disaster-prone. The problem is that the new guardrails protect the profits of issuers without sufficiently reducing the risks to buyers and taxpayers. As a result, the GENIUS Act more likely ensures that the next round of stablecoin failures, when it comes, will