Stablecoins have emerged as a central pillar of the digital asset ecosystem, offering a bridge between traditional fiat currencies and decentralized finance. The GENIUS Act, a stablecoin regulation proposal, is advancing with bipartisan support through the U.S. Senate.[1] Given President Trump’s increased support for cryptocurrency, if the bill successfully passes both chambers, it could be signed into law this year.
With the bill comes intense debate over the legitimacy and risks of stablecoins. Prominent critics like Nobel laureate Paul Krugman have argued that stablecoins lack genuine economic utility and primarily facilitate illicit activity. In a new paper, I critically examine those arguments, and focus here on Krugman’s perspective, considering the latest regulatory developments, especially the proposed GENIUS Act. I also consider the evolving use cases and safeguards that are shaping the future of stablecoins.
The GENIUS Act would primarily regulate fiat-backed stablecoins, emphasizing 1:1 asset backing and strict reserve requirements. The act does not directly cover other types like crypto-collateralized, algorithmic, or commodity-collateralized stablecoins. It also clarifies that compliant payment stablecoins are not securities and prohibits them from offering any interest or dividend payment.
| Types of Stablecoins | |
| Stablecoin Type | Description |
| Fiat-Backed | Backed by traditional fiat currencies (e.g., USD) held in reserves, 1:1 peg. |
| Crypto-Collateralized | Backed by other cryptocurrencies, often over-collateralized via smart contracts. |
| Algorithmic (Non-Collateralized) | Maintains peg by algorithms dynamically adjusting supply; no direct backing. |
| Hybrid | Combines elements of different types, e.g., algorithmic with some collateral. |
| Commodity-Collateralized | Backed by tangible assets like gold or silver; pegged to commodity price. |
As of May 31, 2025, fiat-backed stablecoins overwhelmingly dominate the market, with Tether (USDT) and Circle (USDC) leading significantly with market caps exceeding $150 billion and $60 billion, respectively. Other newer fiat stablecoins, such as World Liberty Financial (USD1) and PayPal (PYUSD), also occupy prominent positions in the top 10. The market also features alternative stablecoin types, including algorithmic ones like Ethena (USDe) and Tron (USDD), and the crypto-collateralized Dai (DAI), although these represent smaller market capitalizations.
| Top Stablecoin Tokens by Market Capitalization (May 31, 2025) | |||||
| Stablecoin Rank | Crypto Rank | Name | Symbol | Type | Market Cap |
| 1 | 3 | Tether | USDT | Fiat | $153,136,026,075 |
| 2 | 7 | Circle | USDC | Fiat | $60,914,773,791 |
| 3 | 26 | Dai | DAI | Crypto | $5,447,064,820 |
| 4 | 27 | Ethena | USDe | Algorithmic | $5,364,231,330 |
| 5 | 47 | World Liberty Financial | USD1 | Fiat | $2,175,828,102 |
| 6 | 57 | First Digital | FDUSD | Fiat | $1,655,974,193 |
| 7 | 82 | PayPal | PYUSD | Fiat | $905,559,841 |
| 8 | 101 | Usual | USD0 | Fiat | $629,597,338 |
| 9 | 121 | TRUE | TUSD | Fiat | $494,787,062 |
| 10 | 146 | Tron | USDD | Algorithmic | $383,073,462 |
Source: Coinmarketcap.com
Krugman’s Critique
Krugman contends that stablecoins do not offer meaningful improvements over existing payment systems, fail as reliable stores of value, and are disproportionately used for speculative trading or illicit finance. He suggests that their risks outweigh their benefits, likening them to destabilizing financial innovations of the past. While these concerns echo those of other academics and previous regulators, they do not fully account for recent advances in regulation, technology, and practical adoption.
A Turning Point in Regulation
The GENIUS Act represents the most comprehensive federal effort to regulate payment stablecoins. Its core provisions are designed to address the issues Krugman raises:
- 1:1 Reserve Backing:Issuers must fully back stablecoins with high-quality, liquid assets, preventing the use of risky or illiquid reserves.
- Regular Audits and Transparency:Monthly attestations and independent audits are required, ensuring that reserve holdings are verifiable and transparent.
- Robust AML Compliance:The act mandates anti-money laundering (AML) protocols that extend to both domestic and foreign issuers, closing regulatory loopholes and addressing illicit finance risks.
- Oversight of Foreign Issuers: Foreign stablecoin providers serving U.S. customers must comply with U.S. standards, preventing regulatory arbitrage.
| Key Features of the GENIUS Act | |
| Feature/Requirement | GENIUS Act Provisions |
| Regulatory Oversight | Issuers >$10B federally regulated; smaller issuers may opt for state regulation |
| Reserve Requirements | 1:1 fiat backing with strict disclosure |
| Algorithmic Stablecoins | Requires Treasury study; no ban |
| Legal Classification | Explicitly excludes stablecoins from securities regulation |
| Regular Audits | Monthly public reserve audits, annual financial audits for large issuers |
| AML Compliance | Mandatory AML programs, transaction monitoring, customer identification, and sanctions compliance |
| Oversight of Foreign Issuers | Must comply with U.S. AML, sanctions, and oversight rules |
Countering Criticisms of Stablecoins
Legitimate Economic Functions
Contrary to claims that stablecoins lack utility, several real-world applications have emerged. Stablecoins enable faster and cheaper international transfers; World Bank data shows that while traditional remittance fees average 6.62 percent, stablecoin-based transfers can reduce costs to below 1 percent.[2] In countries with high inflation or capital controls, stablecoins provide access to dollar-denominated assets, offering a lifeline for savings and commerce in places like Argentina and Nigeria.[3] Major payment networks, including Visa and Mastercard, have begun integrating stablecoins such as Circle’s USDC for cross-border settlement, streamlining processes that previously relied on slow correspondent banking systems.[4]
Illicit Finance and Transparency
While blockchain-based assets have been used for illicit purposes, the scale is often overstated. Blockchain transactions are inherently traceable, and recent reports indicate that less than 0.25 percent of stablecoin activity is linked to illicit addresses.[5],[6] Law enforcement agencies have leveraged this transparency to recover stolen funds, demonstrating that stablecoins are, in many respects, more traceable than cash.[7]
Systemic Risk and Consumer Protection
Krugman’s concerns about systemic risk are well-founded, especially considering the collapse of the algorithmic stablecoin TerraUSD in 2022.[8] However, it is important to distinguish between algorithmic stablecoins, which rely on complex, often fragile mechanisms, and fiat-backed stablecoins, which maintain reserves in cash or short-term Treasuries. The GENIUS Act’s requirements for full reserve backing and independent audits are intended to prevent the kinds of failures that have occurred in the past.
Global Context and Policy Implications
The GENIUS Act represents the first comprehensive U.S. regulatory framework for stablecoins, seeking to resolve long-standing issues concerning oversight and market integrity. This aligns with a global movement towards stricter stablecoin regulation, mirroring efforts like the European Union’s Markets in Crypto-Assets Regulation (MiCA), which sets clear rules for cryptocurrency issuers and service providers while also implementing consumer protection measures.[9] These initiatives reflect a growing consensus that clear, enforceable rules are necessary to harness the benefits of stablecoins while mitigating their risks.
Conclusion
Krugman’s skepticism toward stablecoins highlights important risks, but it does not fully account for the sector’s rapid maturation and the regulatory responses now underway. The GENIUS Act and similar proposals attempt to strike a balance between innovation and safety, offering a path forward that addresses both consumer protection and the need for technological progress. Rather than dismissing stablecoins as inherently problematic, policymakers and market participants should focus on implementing thoughtful, risk-based regulations that supports responsible innovation.
ENDNOTES
[1] Guiding and Establishing National Innovation for U.S. Stablecoins Act of 2025 (GENIUS Act). S. 394, 119th Cong. (2025).
[2] World Bank, Remittance Prices Worldwide Quarterly (2025), https://remittanceprices.worldbank.org.
[3] Chainalysis. (2024). The 2024 geography of cryptocurrency report. https://go.chainalysis.com/2024-geography-of-cryptocurrency-report.html.
[4] Visa. (2023). Visa expands stablecoin settlement capabilities with USDC and Solana. https://usa.visa.com/about-visa/newsroom/press-releases.releaseId.19881.html.
[5] Chainalysis, The 2025 Crypto Crime Report (2025), https://go.chainalysis.com/2025-Crypto-Crime-Report.html.
[6] Financial Action Task Force, Virtual Assets—Targeted Update on Implementation of FATF Standards (2024), https://www.fatf-gafi.org/en/publications/Fatfrecommendations/targeted-update-virtual-assets-vasps-2024.html.
[7] U.S. Department of Justice. (2022, February 8). Two Arrested for Alleged Conspiracy to Launder $4.5 Billion in Stolen Cryptocurrency. https://www.justice.gov/archives/opa/pr/two-arrested-alleged-conspiracy-launder-45-billion-stolen-cryptocurrency.
[8] David Krause, Algorithmic Stablecoins: Mechanisms, Risks, and Lessons from the Fall of TerraUSD. SSRN (January 2025). http://dx.doi.org/10.2139/ssrn.5092827.
[9] Markets in Crypto-Assets Regulation, 2023 O.J. (L 150) 1, https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32023R1114.
This post comes to us from David Krause, an associate professor of practice emeritus at Marquette University’s College of Business Administration. It is based on his recent article, “Were the Leading Economists Criticisms of Crypto Wrong? A Current Examination of Bitcoin and Digital Assets,” available here.