Stablecoins Under Fire: Are They Financial Doomsday or Economic Evolution?

The Alarming Case Against Stablecoins: Frum’s $4 Trillion Warning

Economist David Frum has become one of stablecoins’ most vocal critics, painting a nightmare scenario in The Atlantic. He warns that stablecoins represent “the most dangerous form of cryptocurrency to date,” with potential to trigger America’s next financial crisis.

Frum’s core concern centers on scale and concentration risk. He projects stablecoins could reach $4 trillion (drawing on Citi Bank forecasts), with the vast majority flowing into three-month Treasury bills. The danger, in his view, is acute: if Treasury prices crash—as they did during 2022-2023—panicked holders will rush to redeem simultaneously. Stablecoin issuers would be forced to liquidate $4 trillion in Treasuries at catastrophic losses, sparking a classic bank run.

More provocatively, Frum draws parallels to the 2008 financial crisis. “Stablecoins possess all the risk characteristics of subprime securities,” he argues, potentially forcing taxpayers to bail out private losses once again. He frames the regulatory “GENIUS Act” not as progress but as “lighting the fuse for America’s next financial disaster.”

The Counter-Logic: Why Frum’s Timeline Doesn’t Add Up

Yet critics of Frum’s thesis point out a glaring logical gap. The 2022-2023 Treasury decline lasted 18 months—a marathon, not a sprint. For assets maturing every three months, why would zero-leverage issuers panic? If quarterly Treasury rollovers reset pricing regularly, the historical stress test doesn’t necessarily apply to the stablecoin model.

This debate reveals something deeper: skepticism toward stablecoins often conflates worst-case scenarios with probable outcomes.

The Paradox of Success: Helen Rey’s Alternative Warning

International Monetary Fund economist Helen Rey approaches stablecoins from an entirely different angle. She doesn’t worry they’ll fail—she worries they’ll succeed too well.

If global savings shift massively into stablecoins, Rey argues, the domino effects ripple through the entire financial system:

• Banks lose lending capacity as deposits migrate to crypto rails
• Governments struggle to fund themselves as demand for fiat decreases
• Central banks’ monetary policy tools become blunt instruments
• Tax bases erode as wealth concentrates among a handful of crypto platforms
• Seigniorage—governments’ profit from issuing currency—gets privatized to private companies

Rey’s concern is structural: “We’re not facing a crash. We’re facing the hollowing out of the state’s financial capacity.” The concentration of monetary power among private companies, she suggests, fundamentally undermines the public nature of the international monetary system.

The Middle Ground: Can Stablecoins Be a Public Good?

Federal Reserve economist Steven Milan offers a counterweight to both doomsayers and utopians. Like Rey, he values the dollar system, calling U.S. currency and assets “a global public good.” But he draws the opposite conclusion.

Milan’s strategic insight: if you define fiat currency as infrastructure serving humanity, then stablecoins merely extend that same public good to people locked out of traditional banking. “Stablecoins enable financially repressed groups to more easily access these global public goods, freeing them from harsh financial restrictions,” he argues.

He also challenges Rey’s mass exodus scenario with regulatory specifics. The GENIUS Act stipulates that stablecoins pay no interest and carry no deposit insurance—removing the classic incentives for bank runs. “The real opportunity lies in meeting global demand for dollar assets in regions where dollar channels are restricted,” Milan explains.

Where Rey sees sovereign sovereignty erosion, Milan sees emerging market citizens escaping hyperinflation and exchange rate volatility. Both interpretations rest on whether you view stablecoins as destabilizing parasites or liberating infrastructure.

The Stabilization Thesis: Stablecoins as Financial Shock Absorbers

Economist David Beckworth reframes the entire debate. Rather than viewing stablecoins as systemically dangerous, he proposes they could function as decentralized stabilizers for global financial cycles.

His logic: when the dollar appreciates sharply, emerging market borrowers holding dollar debt face crushing repayment burdens. Stablecoins, simultaneously appreciating, would provide a natural hedge. “Dollar stablecoins create a buffer for emerging markets during periods of dollar strength,” Beckworth explains.

This inverts Frum’s catastrophe narrative. Instead of triggering crises, widespread stablecoin adoption might smooth the very financial volatility that destabilizes developing economies. Beckworth’s thought experiment is striking: “The innovation that once made central bankers tremble may ultimately become their most solid cornerstone.”

The Crime Problem Nobody’s Solving

The unsexy but critical issue: stablecoins facilitate money laundering. The recent indictment of Firas Issa, an Illinois cryptocurrency ATM operator charged with felony money laundering after moving $10 million between cash and crypto, serves as a stark reminder.

Despite blockchain transparency, criminals view stablecoins as ideal on-ramps for dirty money. As stablecoins deepen integration with traditional finance, regulatory experts—including Helen Rey—warn that money laundering risks don’t just persist; they intensify.

Frum makes the pointed observation: betting that criminal activity will boost Treasury demand “puts the cart before the horse.” On this specific concern, the crypto industry has offered limited counterarguments, mostly acknowledging the problem rather than solving it.

The Boring Truth: Maybe Stablecoins Are Just Payment Infrastructure

When British House of Lords member Colwyn Range pressed the government on stablecoin policy, the parliamentary response was spectacularly underwhelming. Lord Livermore, speaking for the Crown, predicted stablecoins would simply “reduce the cost of international payments and improve efficiency.”

Compared to apocalyptic warnings or revolutionary salvation narratives, this prediction sounds remarkably dull. But perhaps that blandness captures an essential truth: stablecoins’ real-world impact may prove far more mundane than either critics or advocates expect. They might simply become efficient rails for cross-border payments—neither destroying the financial system nor revolutionizing it.

The gap between polarized predictions and practical reality suggests the honest answer remains: we’re still writing this story.