Crypto's Big Win
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Former NBA player turned crypto guy Lamar Odom posted a video of himself walking into the Trump National Golf Club in Virginia, passed signs saying, no kings and stop the crypto corruption. Odom was one of the top 220 buyers of Trump's meme coin. And because of that, he got to party with the president.

So did Chinese crypto billionaire Justin Sun, who posted a video from inside the event. Sun was charged by the Securities and Exchange Commission in 2023 for fraud and market manipulation.

This fall, he invested millions in one of the president's other crypto ventures. And come February, the Trump SEC asked a court to pause the lawsuit against him.

According to the Washington Post's analysis, Trump-affiliated businesses have gotten $312 million from crypto sales and $43 million in total fees since the Trump coin debuted in January. Why didn't you tell me that? I would have worn a tuxedo. I just want to tell you it's an honor to be with you.

You know, we've been pushing the market of crypto and bitcoin and all of it, everything. And I do it for a reason, not for me. I really do it because I think it's the right thing to do. We can't know exactly who went to the dinner unless they identify themselves. The TrumpCoin leaderboard only lists their usernames and crypto wallet addresses.

Some may be foreign nationals who can't legally donate to a U.S. campaign, but they can buy the president's crypto. White House Press Secretary Carolyn Leavitt said it's absurd for anyone to insinuate that this president is profiting off the presidency. But there's TrumpCoin, MelaniaCoin, World Liberty Financial, which is tied to the Trump family, and its new stablecoin, USD1.

And here's the thing. Trump is not the only crypto backer in Washington. This week, a crypto-friendly bill passed a key Senate vote. It's called the Genius Act.

The Genius Act folds stablecoins directly into the traditional financial system while applying weaker safeguards than banks or investment companies must adhere to. On Monday, I watched Senator Elizabeth Warren caution against passing this bill on the Senate floor. Make no mistake.

We are likely to see another financial crisis in the coming years. Law professor Hilary Allen was watching, too. She says seeing the Genius Act advance is like watching a slow-moving car crash. The thing I've been worried about all along is something that impacts people that have never invested in crypto.

Hillary teaches law at American University, and she worked with the Financial Crisis Inquiry Commission that examined the 2008 crash. I, for my whole career, have focused on financial crises, how they happen, what we can do to make them less likely.

And what I see with crypto, even though it claimed to be sort of a new alternative to the financial system that busted in 2008, it really replicates and exacerbates everything that was wrong. It accelerates it, it adds new operational risks. And so really, we're setting ourselves up, I firmly believe, for another big financial crisis, which will hurt people that never even invested in crypto.

Today on the show, crypto notches its first big legislative win. Why Hillary says we should all worry. I'm Lizzie O'Leary, and you're listening to What Next TBD, a show about technology, power, and how the future will be determined. Stick around.

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Once again, that's Udacity.com backslash TBD for 40% off and make sure you use promo code TBD. The Genius Act is a first-of-its-kind bill that would regulate the cryptocurrencies known as stablecoins. Unlike Bitcoin or Ether, whose value can fluctuate wildly, a stablecoin is pegged to an underlying asset like gold or a fiat currency like the dollar.

The acronym GENIUS, by the way, stands for Guiding and Establishing National Innovation for U.S. Stablecoins Act. Congress loves a cutesy name.

The law would create a basic legal framework for the coins, who can create them, and how they're classified by the government. Notably, like a lot of crypto, not securities or commodities. Hillary says it reads like a crypto industry wish list. So what this bill does is it basically creates this parallel lighter touch banking regulatory regime for stablecoins. So...

You have to get licensed to issue a stablecoin. But if you do, you don't have to play by all the rules that banks have to play it by. And the justification for that is that what stablecoin issuers are doing isn't as risky as what the banks do, right? Banks take your deposits and then they invest them in all kinds of things.

Often long-term things, there may be a run. That is risky. That is something that we've always known and we like it because it gets money out into the economy through loans, but it comes with downsides. Stablecoins, the reserves that they invest in are...

what we typically call safe assets, cash, treasuries, things like that, things that are typically pretty easy to turn into cash at a moment's notice. And so the argument is they're not so risky.

But you know what they look a lot like? They look a lot like money market mutual funds. Money market mutual funds are funds that have been around since the 70s that also invest in quote unquote safe assets. And you know what? We've seen two runs on money market mutual funds. There was a run in 2008. Again, bailouts required. There was a run in 2020. Again, bailouts required. So to have this light touch law that doesn't

really address the fact that there are risks of runs in this situation, to me, seems crazy. Why do you think this particular kind of legislation is catching on now? Like, why is there momentum to do this now?

I mean, the short answer is because the crypto industry threw a whole lot of money at the election cycle in 2024, and now the receipts are coming due. The crypto industry, by the way, spent more than $130 million on the 2024 elections. The crypto industry really has failed to get the penetration that it wanted. So a recent survey came out from the St. Louis Fed

that said that fewer than 5% of Americans own crypto, right? And of them, fewer than half have more than $3,000 worth of crypto. So this is not something that has gained huge penetration in the United States. And what we often see coming out of these Silicon Valley business models is if you can't succeed on the merits of your business, well, then you try to lobby to get laws that help your business.

And so ever since sort of 2022, the name of the game for crypto has been trying to get the legal status it wanted. So that's been much more important than the technological innovation. And in 2022, a lot of money was thrown by the crypto industry, particularly Sam Bankman Freed, at trying to get certain laws passed. And that's when you first saw these types of laws coming up.

One big impediment to them was that Sherrod Brown, who was the chair of the Senate Banking Committee, was rightfully skeptical of this type of legislation. And that was something that stopped stablecoin legislation from happening. And in 2024, it's no coincidence that he was one of the chief targets of the crypto spending that

And was defeated. And was defeated, yep. And now Republicans obviously have the control in both the House and the Senate. Republicans have typically been pretty friendly towards crypto. There are also very friendly crypto Democrats. And with all of them together and with this sort of sense that it's time because the crypto industry has sort of paid for this, that this should be the priority. And I think it's,

It's worth stepping back and thinking about that for a second. We're talking a tiny fraction of the American population that owns crypto. We're talking about a country with so many big problems that need to be solved.

And the fact that this is the only thing that Congress can really get together and move on in a bipartisan way is frankly pretty damning. When you say makes it less safe, is that because you think, you know, big commercial players are buying crypto assets or buying crypto ETFs or because if...

one of the big stable coins fails, that the U.S. will then be kind of talked into a bailout.

Yeah, I think it's a good question. And I think it's sort of a little bit of column A and a little bit of column B, right? They go together. If crypto can fail and it's not a big deal, then we don't have to do a bailout, right? That's the situation we had in 2022, where we all celebrated for a brief moment how great it was that crypto wasn't integrated with the rest of our financial system and there were no spillovers. But

But the more that institutional players are attracted into this space, and really that's the name of the game with this kind of legislation is legitimizing this stuff for institutional players. So the more institutional players get into this space, the more pension funds invest in this.

The bigger it gets, the more interconnected it gets with the other parts of our financial system. The more inevitable it is that there will either have to be bailouts or people losing their pension funds when the crypto industry busts. There's also this other part of the bill that I want to get into before we get deep into some of the other players. Yeah.

It basically would allow a tech company, Meta, Amazon, Google, what have you, to issue its own stablecoin. They would have to get some regulatory approval. But is the goal here like you buy your Meta-backed stablecoin and then go on a Meta platform and have a targeted ad serve to you because of what Meta knows about you and then you spend your Meta asset on something?

Yeah, I'm glad you raised this because this is, you know, of all the things that keep me awake at night, this is the thing I'm most worried, which is about basically the largest tech platforms becoming our de facto banks. And if you want to sort of know what that looks like, you can look to China, where it's already happened.

So you have things there like Alipay and WeChat Pay being sort of there. They're just financial wallets. They're not even stable coins, right? They still have to be linked to a bank account somewhere. What we're offering up with this legislation is the opportunity for these tech platforms to cut the banks out entirely, right? So you buy your stable coin, you keep your stable coin online.

you know, in a wallet on that platform. The idea is to keep you on the platform as much as possible, right? If you can pay within the platform, you never have to leave, you never have to log out. They have all the data about what you're paying for things, and that's really important data. This sounds like Elon Musk's everything app idea. Funny you should mention that, because there's, I think, an exception, tailor-written for Elon Musk in this article,

in this statute. So you mentioned that it's not a complete free-for-all for the big tech platforms to offer a stablecoin. They have to get approval from a small committee of government officials. And I think in this current administration, that's a fait accompli probably that that would be given. But in a future administration where it might be a little harder to convince the authorities,

That committee only weighs in if the stablecoin is offered by a publicly traded company. So if you are private, for example, X, then you don't have to worry about that. Oh, wow. Yeah. When we come back, sure, the Trump administration wants this bill, but so do several high-profile Democrats.

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And if you have existing numbers with another service, Open Phone will port them over at no extra charge. Open Phone. No missed calls. No missed customers. Let's talk about the political players here. Obviously, the president and the Trump family are deeply invested in crypto. World Liberty Financial recently launched its own stablecoin, USD1.

And a few weeks ago, an Abu Dhabi investment firm chose that stablecoin to finance an investment in the crypto exchange Binance. Is there any way that the Trump family wouldn't make money from this bill? I don't think so. Yeah.

I mean, as I said, the whole point of this bill is to legitimize stablecoins, to encourage people to come into the market because it has a patina of regulation and seems to have congressional blessing. So more people buying stablecoins, more liquidity for stablecoins. That's the end goal. And so, of course, that's going to benefit other stablecoin issuers. But it's not just Trump. There are 16 Democrats who are behind this. Senator Gillibrand is one of the sponsors.

Why are so many Democrats supportive of this? Well, I think the story, again, goes back a little while, particularly to Sam Bankman Freed in 2022. You know, there has always been an explicit attempt by the crypto industry to court Dems as well as Republicans to play both sides of the aisle. And the rhetoric that they've used with

democratic constituencies is very much the rhetoric of financial inclusion, right? People who were locked out of banking before and now this provides an alternative. And that makes sense when you think theoretically about sort of DeFi protocols. Yes, I can see that argument. Well, do you want me to tell you why it's wrong? Sure. Yeah. I have had this conversation with stablecoin executives who have admitted I am right in private.

To get a stablecoin, you must go onto a crypto exchange and purchase it. To open an account with a crypto exchange, you must have a bank account.

We are not banking the unbanked here, people. It is a furphy. But if you are a Democrat and you want crypto industry money, if you want to be friendly to this industry, it's a very neat, you know, albeit superficial narrative to call like that these are people who are getting financial services who otherwise wouldn't be. It's not true.

But it works for the Democratic brand. They're also using the inevitability argument, which Mark Warner from Virginia made, basically saying blockchain technology is here to stay. If American lawmakers don't shape it, others will. And I can see the argument he's making that, OK, stable coins are less risky, theoretically, than other crypto assets. And that by doing this, they...

you know, put in some kind of threshold for liquid safe or safer assets. Does that hold any water for you?

Not really for two reasons. You know, the first reason I already sort of spoke about a little bit, and that is that there were already laws on the books that could have addressed this and addressed this in a much more robust way in terms of protecting both consumers and the financial system. Like making the Fed their regulator?

Yeah, I mean, you want to do this, get a bank charter, right? If you don't have a bank charter or you don't fit within the money market mutual fund regulations, you cannot do this, right? So that's sort of one argument that this is actually worse than the status quo. And then there's the inevitability argument, which is something that I really sort of struggle with a lot personally. I think...

We cede so much public interest by just sort of accepting that whatever the tech industry comes up with is something that we just have to take and accommodate. And it's linked to the point I just made, which is that there are laws on the books that can address a lot of this. And yet we don't enforce them because we've sort of become captured by this narrative that

Tech innovation is something that is so powerful, we could never stop it if we tried. But also, tech innovation is something so vulnerable that we should never get in the way of because we need to nurture and protect it. And it doesn't really work that both of those can be true. But we hear both narratives weaponized all the time. I covered the 2008-2009 crash. You were on the Financial Crisis Inquiry Commission. Yes.

Where would you put stable coins if you had to think about the things we saw then that were kind of unexploded ordinances in the financial system? That's a tough one, you know, because history doesn't repeat, but it rhymes. The closest analogy for me is

are the money market mutual funds. Which broke the buck. Which broke the buck, yeah. That meant the value of one share fell below a dollar. I remember it. It was scary for a lot of regular people's retirement funds. So not the thing that kicked off the crisis, but a transmission mechanism of panic and something that needed to be

bailed out in the end because they weren't as safe as everyone thought they were. So I wouldn't call stablecoins necessarily the credit default swaps, the weapons of mass destruction that caused the crisis. But I would point out that for a problem in the crypto industry to actually have ripple effects, it has to get big and interconnected with the rest of the financial system.

And stable coins are the mechanism for doing that. So even if they're not the trigger for a future crisis, they are both a transmission belt of problems and a prior factor that's likely to make that crisis a bigger deal.

Hillary also points out that stablecoins are not always so stable. The stablecoin USDC was initially pegged to the dollar, but the company that issued it held its reserves at Silicon Valley Bank. When the bank collapsed in 2023, the value of one USDC share, which was supposed to stay at a dollar, fell below 87 cents.

So they're not that safe. And one thing that I think is really interesting on this point is that people say, well, okay, they lose their peg all the time and no one has run yet. And my answer to that is, I think that's because right now the way people look at stable coins is that you either use them for illegal payments or you use them as an on-ramp or off-ramp for crypto speculation. You don't treat them like your money.

But what this bill does is it's sort of broadcasting to Americans, this is a safe money substitute. Once it becomes treated as money by people, then even the smallest de-pegging can be enough to cause people to freak out. So if you're someone who's listening to this, who's like, I don't care about crypto, that's for tech guys. I'm not going to put my money in that. You could still get burned. Yeah.

What should people do if they hear what you say and they're terrified? Well, I mean, there's two things. First is, you know, you can protect yourself from the immediate effect by not being a crypto investor, right? Even if this law gets passed, you hopefully know that stable coins are not as safe as they appear to be. You know that the bill does nothing to address a run because it assumes the one will never happen.

So hopefully that will be enough to discourage you from buying a stablecoin. Oh, another reason why you should never buy a stablecoin. There's this sort of rhetoric that people think that you can go to the stablecoin issuer and get a dollar back from them for your stablecoin. Because that's how bank deposits work. That's how a money market mutual fund works. You can go to the issuer and they can redeem.

With a lot of stable coins, a lot of like particularly USDC, most customers have no direct redemption right against the issuer. The big fish do. They can go to USDC and say, give me a dollar for my stable coin. But for average Joes, you're restricted to selling on an exchange. And if people don't want to buy it from you from a dollar, you're not going to get a dollar for it, even if it has the reserve of assets there.

So this has been your PSA for why stablecoin usage is not great. But that doesn't protect you from the second order effects of if crypto blows up our whole economy.

What do we do? And sadly, the only way to address that is through our democratic process. I think the crypto industry has benefited very much from this being a low salience issue. Like to the point you made, like most people are like, I don't care about crypto. I don't want to learn about this stuff. I'm not going to pay any attention to it. And because the public hasn't been paying attention, which I understand and respect, a lot of this stuff has been allowed to progress without much pushback.

I think the irony is that Trump's involvement in all of this has raised the salience and more people are now saying, OK, why is this crypto bill getting passed by Democratic senators when it's such a gift to Donald Trump? So I think we're at the beginning of sort of a mobilization of public support against the industry's legislation. And I guess that's the only silver lining I see.

What would good crypto legislation look like? Well, I mean, I testified before the Senate Banking Committee after the fall of FTX. And I was asked, I think by Senator Van Hollen, if you were queen for a day, what would you do? And I said, I'd ban it. And I think...

There's this misunderstanding that, you know, the industry will tell you that a ban is impossible. It's not impossible. But I very much doubt we're going to get there. So then what else could we do? To my mind, you know, legislation that confirms that this is either a bank deposit or a money market mutual fund and you need to operate within one of those frameworks is what I'd be looking for.

Hilary Allen, thank you so much for coming on and for talking with me. It's been a pleasure. Thank you for having me. Hilary Allen is a professor at American University Washington College of Law. She's also the author of Driverless Finance, FinTech's Impact on Financial Stability. And that is it for our show today. What Next TBD is produced by Patrick Fort and Shaina Roth.

Our show is edited by Evan Campbell. TBD is part of the larger What Next family. And if you like what you heard, the number one best way to support our independent journalism is to join Slate Plus. You get all your podcasts, including this one, ad-free and no paywall on the Slate site. Just head on over to slate.com slash whatnextplus to sign up. We will be back next week with more episodes. I'm Lizzie O'Leary. Thanks for listening.

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