Payments systems must be built on public infrastructure, not speculative tokens, writes Jean Tirole.
TABLECOINS HAVE entered the financial mainstream, thanks in no small part to the GENIUS Act. This American law, passed in July, creates a regulatory framework for these digital tokens, thereby lending them legitimacy, and opens the way for financial institutions to launch their own versions. One of the crypto ventures backed by President Donald Trump and his family has issued a stablecoin, USD1. The value of the most popular stablecoin, issued by Tether, has leapt by 46% in the past 12 months, to $174bn.
This type of cryptocurrency, which is pegged to real-world assets like the dollar, promises more stability than Bitcoin, with its wild swings. It is also marketed as a cheap, rapid means of payment. Yet stablecoins will bring more risks than benefits-and alternatives exist.
The supporters of the first wave of cryptocurrencies, led by Bitcoin, were a curious mix of technological enthusiasts, libertarians bent on escaping government control, money-launderers and speculators seeking easy riches. The firms in this vanguard thrived on seigniorage (from the minting of coins) and transaction fees (levied by platforms that enabled them to be traded).
Their critics saw little social value. Cryptocurrencies make it easier to dodge tax, deprive governments of seignorage revenues and burn resources in energy-guzzling mining.They also challenge central banks' ability to stabilise economies in crises and to restrain capital flight from economies facing speculative attacks. Their volatility rules out any serious use as money.
Stablecoins arose as a supposed solution to the last of these problems. By pegging value to dollars or other safe assets, they claim to combine digital efficiency with stability. They also present themselves as rivals to the expensive incumbents-banks, and payment platforms like Visa, PayPal and SWIFT-especiallyfor cross-border transfers. At first glance, this looks like progress. But financial innovations with an aura of safety often sow the seeds of crises, as derivatives and bundles of subprime securities did before 2008.
Stablecoins, like money-market funds, project security but can collapse under pressure. Governments may then feel compelled to bail out holders to protect small businesses and households, to prevent financial contagion or to preserve reputations as cryptofriendly jurisdictions. This expectation encourages risk-taking.
Proponents insist that stablecoins are fully backed by "dollars" (that is, dollar-denominated cash, bank deposits, us Treasuries, money market funds) and that regular audits by an accounting firm verify the level of reserves, with regulators interpreting the findings and doing whatever enforcement is required. In practice, full backing is not a sure thing. Tether has been fined for misrepresenting its reserves, which have never been fully audited by an independent entity; Circle, another stablecoin issuer, had 8% of its reserves jeopardised by the collapse of Silicon Valley Bank (fortunately for Circle, SVB's uninsured depositors were bailed out with public money).
Even when backing is real, small doubts about its completeness can spark destabilising runs: in 2022, for instance, the Terrauso stablecoin collapsed (though it was an "algorithmic" coin, less secure than the fully reserved kind).Worryingly, the rules under the GENIUS Act on redemption-covering the honouring of holders' requests for their money back, the suspension of payments to stabilise liquidity under stress, and so on-remain vague.
Moreover, safe assets such as cash and government bonds yield little. History is littered with prudentially constrained banks that went searching for riskier assets disguised as safe. Why assume stablecoin issuers, much less regulated than banks, will behave better and refrain from seeking yield by taking risks with, say, interest rates or uninsured deposits?
GENIUS forbids stablecoin issuers from paying interest, a sop to banks worried about losing deposits (which, incidentally, would jeopardise financial intermediation and therefore the availability of credit). The prohibition does not apply to stablecoin platforms, such as Coinbase and PayPal. This distinction provides a loophole: a platform can partner with an issuer while remaining exempt from rules governing it.
Some platforms use this loophole to offer backdoor rewards (as both Coinbase and PayPal do through rebates) and take risks to fund them. Yet unlike banks, they need not meet capital and liquidity standards or pay deposit-insurance premiums. They thus join the ranks of shadow banks-institutions that enjoy implicit public backstops without bearing the regulatory costs.
The risks are amplified by political dynamics. The current American administration has personal financial interests, an ideological tilt and a geopolitical incentive to promote crypto, which bolsters global demand for dollars, thereby helping to finance the trade deficit. Regulators sympathetic to crypto have been appointed. Light-touch supervision seems inevitable.
For Europe and others, this is worrying. Any move to regulate dollar-based stablecoins tightly may be painted by the Trump administration as an unfair trade barrier, much as America currently frames Europe's attempts to rein in tech giants-most recently by finding Apple and Meta in breach of the the EU's Digital Markets Act.
Stablecoins highlight a genuine need for payments that are faster, cheaper, round-the-clock and "programmable" (to execute and settle automatically, and more efficiently, when particular conditions are met). But public authorities can and should deliver this directly. Brazil and China already have efficient digital systems; the euro zone is preparing its central-bank digital currency. The payment system is a public good.
But because innovation often comes from private enterprise, the public infrastructure should be open and offer programming interfaces that allow entrepreneurs to build applications on top of the system. Done right, such a system could blend public trust with private creativity.
Stablecoins may dazzle as the latest financial fad. But they risk destabilising finance while enriching a few. The better course is to treat payments as a shared utility, not a speculative playground.
Article published in The Economist on September 29th 2025.
