When Regulators Are Investors: How Stablecoins Institutionalize 2008’s Self-Dealing The president who signed the legislation profits directly from the industry it regulates—and investors fund assets they can’t value
by Michael Lamonaca, 11 December 2025
The GENIUS Act—legislation regulating stablecoins—was signed by a president whose family earned over $1 billion from the crypto industry in the past year. This isn’t regulatory capture through lobbying. This is direct financial interest: the person signing the law profits personally from the industry it governs. When Trump pardons Binance’s founder after the company was fined $4 billion for facilitating terrorist transactions, when the Justice Department reduces crypto fraud investigations, when legislation allows stablecoin issuers to hold risky assets without deposit insurance while guaranteeing taxpayer bailouts if they fail, the arrangement isn’t hidden—it’s institutionalized. The 2008 crisis emerged from Wall Street creating “safe” assets backed by subprime mortgages, with regulators asleep and executives profiting while taxpayers absorbed losses. Stablecoins repeat this pattern with an added feature: policymakers now profit directly. And billions flow in from investors who would never buy a restaurant without reading financial statements, because stablecoins offer something verification can’t touch—the promise of fast returns built on hype rather than the compound effect of earnings growth, dividend reinvestment, and business fundamentals accumulated over decades. When conflicts of interest are institutionalized and valuation is impossible, the collapse is structural, not speculative.
The structural mechanics replicate 2008’s playbook with precision. Wall Street packaged subprime mortgages into bonds, rating agencies stamped them AAA despite underlying risk, banks sold them to investors who trusted the ratings without examining the assets, and when defaults cascaded, taxpayers funded the bailout. The GENIUS Act follows this template exactly. Stablecoin issuers package deposits into digital tokens promising dollar stability. The legislation provides implicit government backing by requiring reserve disclosure but not deposit insurance, creating the assumption that defaults won’t happen while guaranteeing bailouts when they do. Investors who can’t audit reserves in real time trust the “stable” label without verification capacity. Crypto companies lobbied for regulations written to maximize their profit while minimizing their accountability, spending tens of millions to ensure the framework protects issuers rather than depositors or taxpayers.
The incentive structure is identical to 2008: benefits concentrate among issuers and early adopters, risks diffuse across the entire financial system, and the timeline problem strikes—leaders who impose strict regulations face immediate industry backlash and campaign contribution losses, while those who enable risk face consequences only when crisis materializes, likely under different leadership. Tether CEO Paolo Ardoino announced the company is considering fundraising at a $500 billion valuation. This valuation assumes continued ability to accept deposits, invest them in higher-yielding assets than promised to depositors, and extract profits from the spread—the classic bank model, except without deposit insurance, capital requirements, quarterly examinations, or lender-of-last-resort backing. The GENIUS Act legitimizes this arrangement while the president who signed it profits from the industry’s expansion.
The human dimension reveals how conflicts of interest and financial illiteracy combine to fuel disaster. Before buying a restaurant, a rational investor reads financial statements: gross profit margins over five years, net income trends, debt-to-income ratios, retained earnings growth, return on equity, dividend capacity. You calculate what return the business needs to deliver before the purchase price makes sense. You verify assets exist, audit cash flow, understand the business model generating revenue. If statements show declining margins, rising debt relative to income, negative retained earnings, or returns below your required threshold, you don’t invest regardless of hype.
Stablecoins offer none of this verification capacity. No earnings per share to track over time. No dividend payments to collect and reinvest. No balance sheet showing assets and liabilities you can audit continuously. No return on equity demonstrating management efficiency. No business model beyond “we take your dollars, promise to return them, and profit from the spread.” The only financial disclosure is annual audits of reserves—snapshots that become obsolete the day they’re published, useless for investors needing to assess risk in real time when redemption panics happen in minutes.
Yet billions flow into stablecoins from investors who apply zero due diligence. When people ask “do you invest in Bitcoin?” after hearing about disciplined fundamental analysis, it reveals the disconnect: they’re investing based on news, hype, and fear of missing out rather than evaluating whether an asset generates returns justifying its price. This isn’t investing—it’s speculation on price movement disconnected from underlying value. Real wealth accumulates through the compound effect of businesses earning profits, reinvesting them to grow, and distributing dividends that investors reinvest over decades. A company with consistent 15% return on equity, growing earnings per share, rising dividends, manageable debt, and increasing retained earnings compounds investor wealth through business performance, not price speculation.
Stablecoins compound nothing except issuer profits extracted from depositors who can’t verify the reserves supposedly backing their holdings. The Trump family’s $1 billion in crypto profits didn’t come from patient capital allocation and dividend reinvestment—it came from regulatory arbitrage, influence peddling, and profiting from legislation the president signed while holding financial interest in its beneficiaries.
Historical precedents illuminate how “stable” assets collapse when their promised safety proves illusory. Before federal deposit insurance existed, bank runs were common—panic would spread when depositors feared a bank couldn’t honor withdrawals, causing the very insolvency they feared as simultaneous redemption demands exhausted reserves. The Federal Deposit Insurance Corporation, created after the 1930s banking crises, solved this by guaranteeing deposits up to certain limits, eliminating the incentive to rush for withdrawals at first sign of trouble. Stablecoins remove this century-old protection while reintroducing the vulnerability it was designed to prevent. The 2008 subprime crisis centered on mortgage-backed securities rated AAA despite containing loans to borrowers with no income verification, no down payments, and adjustable rates designed to reset higher. Rating agencies assigned top grades because issuers paid them, creating incentive to approve rather than scrutinize. Banks sold these securities as safe investments. When housing prices stopped rising and borrowers defaulted, the “safe” assets collapsed, requiring government intervention to prevent systemic failure.
The 2008 money market fund crisis followed similar dynamics. Money market funds promised stable $1 net asset value while investing in commercial paper and short-term debt yielding higher returns than the funds paid depositors. When Lehman Brothers collapsed and its commercial paper defaulted, Reserve Primary Fund “broke the buck”—its net asset value fell below $1, triggering panic. Investors rushed to redeem, forcing funds to sell assets at losses, threatening cascade across financial system. The federal government stepped in to guarantee $2.7 trillion in uninsured money market fund assets, preventing collapse but establishing precedent: when supposedly stable vehicles face runs, taxpayers absorb losses.
Stablecoins replicate this pattern with digital acceleration. Terra, once among the top stablecoin issuers, collapsed in May 2022, evaporating nearly $60 billion in assets. The promise of stability proved false when market stress revealed the reserves couldn’t support redemptions. Tether faced similar pressure that year when market doubts about its reserves triggered $10 billion in redemptions over two weeks. The company survived, but the episode demonstrated the fragility—any loss of confidence can spark runs that exhaust reserves within days.
The GENIUS Act doesn’t prevent this dynamic. It legitimizes it by providing regulatory framework without the safeguards that make banking stable: deposit insurance protecting depositors, capital requirements ensuring solvency, frequent examinations catching problems early, lender-of-last-resort access preventing liquidity crises. Instead, the act allows issuers to hold Treasuries with maturities up to 93 days—bonds that fluctuate in value when interest rates change. In summer 2022, three-month Treasury rates rose from below 0.1% to 5.4%. If issuers needed to sell bonds during that period to meet redemptions, they would have realized losses, potentially exhausting reserves.
Competing narratives about stablecoin utility reveal the gap between marketing and reality. The crypto industry argues stablecoins provide faster, cheaper payment systems than traditional banking. Bank transfers take time, international remittances carry high fees, and cryptocurrency supposedly enables seamless global transactions. The GENIUS Act’s supporters claim it will increase demand for U.S. Treasuries and strengthen the dollar’s global reserve currency status by making dollar-backed stablecoins the foundation of digital finance.
The evidence contradicts these claims. A 2023 Federal Deposit Insurance Corporation survey found only 3.3% of cryptocurrency holders use it for payments, and only about 2% use it to purchase actual goods. Most holders speculate on price movements rather than using crypto as currency. Meanwhile, according to blockchain analytics firm Chainalysis, nearly $3 billion in cryptocurrency was stolen in just the first half of 2025. The CEO of a Texas pharmaceutical company mistyped an address digit and transferred about $1 million in stablecoins to a stranger who refused to return it. Stablecoin issuer Circle stated it wasn’t responsible. For legitimate transactions, crypto remains vulnerable to scams, hacking, theft, and irreversible errors traditional banking systems prevent.
The actual advantage stablecoins provide is regulatory arbitrage—using the dollar system while avoiding U.S. oversight. Currently, about 99% of stablecoins are pegged to the dollar. The GENIUS Act claims to require anti-money laundering compliance and “Know Your Customer” verification, but only for coins initially issued in the U.S. How they’re transferred afterward, to whom, and where they flow remains largely untraceable. Tether plans to launch stablecoins not aimed at U.S. or EU customers, completely bypassing these rules. Decentralized exchanges allow swapping stablecoins without regulation, making unregulated coins easily accessible to U.S. markets.
The real demand for stablecoins comes from actors seeking to avoid oversight: money launderers, tax evaders, sanctions violators, and criminal enterprises. The global illicit finance market is estimated at $36 trillion, representing 10% of global wealth. Stablecoins provide infrastructure for moving these funds. In 2023, Binance was fined over $4 billion for allegedly facilitating transactions for terrorist organizations. President Trump subsequently pardoned Binance’s founder, and reports indicate Binance will cooperate with the Trump family’s crypto projects. The alignment of financial interests and policy decisions becomes explicit.
The verification challenge exposes why stablecoin “stability” is marketing rather than reality. After Japan’s rare earth capitulation in 2010, studies claimed diversification was achievable—deposits existed outside China, alternatives could reduce dependence. These analyses were technically correct but operationally misleading because the timeline for building alternatives exceeded the timeline for crisis impact. Stablecoins present the same gap between theoretical safety and practical vulnerability.
The GENIUS Act requires issuers to back coins with “liquid assets such as dollars or short-term Treasuries” and disclose reserve composition monthly. This sounds reassuring until examining operational reality. Monthly disclosure creates information lag of 30 days minimum. Stablecoin redemptions happen in seconds. An issuer appearing sound in a monthly report could be insolvent a week later. By the time investors see concerning reserve data, the crisis has already materialized.
Even with current reserves, the act allows Treasuries with maturities up to 93 days. These bonds yield about 4% annually but carry interest rate risk—when rates rise, bond values fall. If issuers need to sell bonds to meet redemptions during rate increases, they realize losses. The first redemptions get paid, but the act of paying them depletes reserves, making subsequent redemptions harder to fulfill. This creates incentive to redeem immediately once any doubt emerges, precisely the bank run dynamic deposit insurance prevents in traditional banking.
The act prohibits stablecoin issuers from paying interest, supposedly preventing them from competing with banks. But the restriction is meaningless. Issuers profit by investing deposits in higher-yielding assets than they promise to redeem. They don’t need to pay interest to depositors—they extract value through the spread between what they earn on reserves and what they owe depositors. Meanwhile, depositors receive no compensation for the risk they’re taking, unlike bank depositors who earn interest and receive FDIC insurance protection.
The consequences extend beyond crypto speculation to systemic financial risk if stablecoins scale as predicted. Currently the stablecoin market totals between $280 billion and $315 billion, roughly the size of the 12th largest U.S. bank. A complete collapse would hit the financial system but likely prove survivable. Citigroup predicts that if the GENIUS Act takes effect as written, the stablecoin market could reach $4 trillion by 2030. A default at that scale creates severe systemic shocks.
Tether, headquartered in El Salvador, holds $135 billion in U.S. Treasuries, making it the 17th largest holder of U.S. government debt globally, just behind Germany. If Tether faced a redemption run and needed to liquidate Treasuries rapidly, the selling pressure would push Treasury prices down and yields up, raising borrowing costs across the entire U.S. economy. Other stablecoin issuers facing similar pressure would compound the effect. The Treasury market is the foundation of global finance—disrupting it creates cascade effects through every asset class.
The GENIUS Act’s supporters argue it will increase Treasury demand and strengthen dollar dominance. But this demand comes with structural fragility. When stablecoin issuers are the marginal buyers of Treasuries, their stability matters. If crisis forces them to become sudden sellers, the market impact could be severe. Traditional Treasury buyers—foreign governments, pension funds, insurance companies—invest for long-term stability. Stablecoin issuers hold Treasuries as reserves against potentially volatile redemption demands, creating correlation between crypto market stress and Treasury market disruption.
The act attempts to prevent this by requiring reserve diversification and liquidity maintenance. But these requirements can’t solve the fundamental problem: stablecoin issuers promise instant redemption backed by assets that may not be instantly liquid at full value. Traditional banks manage this through deposit insurance (preventing runs), capital requirements (ensuring solvency), regular examinations (catching problems early), and central bank access (providing emergency liquidity). Stablecoins have none of these protections but face the same structural vulnerability—maturity transformation, the practice of funding long-term assets with short-term liabilities.
Contrast this fragility with how actual wealth compounds over decades through business fundamentals. A company earning 15% return on equity that retains half its earnings to reinvest and pays the other half as dividends creates compounding for investors. The reinvested earnings generate additional profits next year. The dividends get reinvested to buy more shares, which generate more dividends. A $10,000 investment at 15% annual returns becomes $40,000 in 10 years and $660,000 in 30 years. A $1 million investment becomes $4 million in 10 years and $66 million in 30 years—through business performance generating real profits, not price speculation disconnected from value creation. This is how patient capital allocation builds generational wealth, managed by people accountable to shareholders, verified through audited financial statements investors can examine continuously.
Stablecoins offer none of this. No earnings to compound. No dividends to reinvest. No business generating value. Just promises to maintain dollar parity backed by reserves you see once annually in audits obsolete immediately. The “returns” come from price speculation disconnected from underlying value creation, or from issuers extracting profits from the spread between what they earn on reserves and what they promise depositors. When the president signing legislation enabling this arrangement profits personally from the industry’s expansion, the conflict isn’t subtle—it’s institutionalized self-dealing.
When regulators profit from the risks they authorize and investors fund assets they can’t value, collapse becomes structural rather than speculative—the question isn’t whether it happens, but who pays when promises to taxpayers get broken the same way promises to depositors do.
Tags: Stablecoins, Cryptocurrency, Financial Regulation, GENIUS Act, Trump, Conflict of Interest, 2008 Financial Crisis, Investment Due Diligence, Regulatory Capture, Systemic Risk