Crypto’s 16-year regulatory ‘vacuum’ is a threat to financial stability

After more than a decade of regulatory ambiguity, US lawmakers are opening federal doors to the stablecoin market. The Senate Banking Committee has tabled the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act, a bipartisan bill that could establish a clear framework for dollar-pegged digital tokens. 

Stablecoins seem “safe,” but to thousands of crypto fraud victims, anything involving crypto is a hard pass.  

The legislation, led by Senator Bill Hagerty and co-sponsored by a cross-party coalition, is the Trump administration’s most profound attempt to impose oversight on the industry, accused of operating in a legal gray area.

Still, for the past 16 years, crypto firms have sidestepped the strict compliance standards traditional financial institutions have faced. Regulators in the US have been debating classifications and jurisdictions, but even with the GENIUS Act, it appears they might be too slow. 

There is no way to calm the public’s cries, as they have already lost billions of dollars to entities and hackers with fraudulent tendencies. 

National security and economy at stake

Supporters of the stablecoin bill argue that unregulated assets are a clear threat to America’s financial security, and they are right. Without regulatory clarity, firms may move operations offshore to jurisdictions with lax oversight, compromising transparency and reducing the US government’s capacity to monitor capital flows.

According to FBI data, Americans aged 60 and older reported nearly $3 billion in crypto-related fraud losses in the past year. Over $9 billion was lost to crypto scams, more than half of the $16.6 billion in total fraud reported.

FBI: Americans aged 60 and older reported losing almost $3 billion to crypto fraud last year. In total, Americans reported being scammed out of around $9.3 billion via crypto, out of a total $16.6 billion in total reported losses that year. pic.twitter.com/xupom9DeUn

— Molly White (@molly0xFFF) April 23, 2025

The Trump administration has tried to bring regulatory heads together. Still, the debate on who has regulatory authority over crypto between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) is far from over. 

Europe uneasy over dollar-pegged stablecoin dominance

Earlier this week, European Central Bank (ECB) officials, including President Christine Lagarde and digital payments chief Piero Cipollone, said that the United States’ promotion of dollar-backed stablecoins poses systemic risks to Europe’s economy.

According to a confidential ECB policy paper obtained by Politico, the bank has asked governors to revise the EU’s landmark crypto regulation, the Markets in Crypto-Assets (MiCA) framework. 

The ECB is worried that Trump’s pro-crypto initiatives, including the GENIUS Act, the proposed STABLE Act, and a White House executive order for the creation of a strategic crypto reserve, could increase demand for dollar-denominated assets within the EU, undermining European monetary independence.

Projections from Standard Chartered suggest that if the GENIUS and STABLE Acts are implemented, the supply of dollar-backed stablecoins could skyrocket to $2 trillion by 2028, up from the current $240 billion. 99% of stablecoins are already pegged to the dollar and backed largely by US Treasuries

European regulators are now concerned that capital flight could threaten the stability of EU financial institutions.

US regulators warned early of destabilization

Long before the GENIUS Act’s emergence, top US financial bodies issued admonitions about the risks posed by digital assets. In early 2022, both the Federal Reserve Board and the Financial Stability Oversight Council mentioned scenarios of destabilization due to the increasing integration of crypto, particularly stablecoins, into the financial system.

Frequent hacks, operational failures, and mismanagement, most notably seen in the collapse of crypto exchange FTX, compounded those concerns. Without the safety nets available in traditional banking, such as FDIC insurance or Federal Reserve lending facilities, investor confidence in crypto could plummet unexpectedly and trigger cascading losses across markets.

The crypto industry is as close as it has ever been to a $10 trillion valuation, nearly 80% of all US mortgage debt, and over half of total deposits held in American banks. That it has grown that much with minimal regulatory oversight is scary but admirable.