Trump has normalized crypto. Is it the path to the next financial collapse?

It should not be surprising that Donald Trump made a lot of money, $2.2bn, during his first year as president. He did not even try to hide that he was using his position for personal gain. Unlike other presidents who put their businesses into a trust fund, Trump kept his. This meant he had many chances to benefit himself, and people could easily see when he did deals with foreign governments or wealthy individuals.

It is concerning that the US president would so easily use his official power for profit, especially when dealing with people accused of money laundering or with leaders from the Middle East. It is also worrying that the systems designed to limit a president's power in America were not able to stop him.

What is most concerning, however, is how much Trump has put the stability of the US economy at risk. His business deals are not small matters that are harmless to the country. Trump's most profitable activity, which earned him $1.2bn, was in the cryptocurrency industry. In return for this, Washington reduced the power of regulators over crypto and helped connect the digital currency to the formal financial system. This decision could end up costing everyone a lot of money.

Cryptocurrencies like bitcoin have existed for 17 years, but they have not yet found a clear, positive use. They are mostly used for illegal activities, to help countries like Russia and Iran avoid international sanctions, or as risky investments for people who like to gamble their money, similar to tulip bulbs in the 17th century.

Trump once called crypto a scam. This changed after the industry invested heavily in his presidential campaign and when he personally invested in crypto businesses. He started a company called World Liberty Financial and sold a large part of it to an investment firm linked to the United Arab Emirates. He also created his own memecoin, $Trump, which caused investors to lose almost $4bn, while the president personally gained over $600m.

Trump stopped the Securities and Exchange Commission's program for regulating crypto, which halted lawsuits and investigations. He also reduced the staff in the department responsible for overseeing the industry. The Department of Justice also announced it would stop investigating and prosecuting crypto companies for activities like money laundering.

Then, with campaign money from the crypto industry, many politicians in Congress supported the Genius Act. Trump strongly promoted this law, which connected crypto to the regular banking system where people's savings are held.

Now, banks, financial companies, and even retailers like Walmart can create their own 'stablecoins'. A stablecoin is a type of cryptocurrency that is designed to keep a stable value, usually pegged to $1. Currently, they are mainly used to buy and sell more volatile cryptocurrencies like bitcoin.

Unlike regular bank accounts, stablecoin savings are not insured by the FDIC. The companies that issue stablecoins promise to invest all the money they receive in safe assets, like government bonds. The goal is to make stablecoins useful for more than just trading risky crypto assets and to create a payment system that can handle transactions quickly and cheaply.

Financial companies are investing heavily in crypto. Mastercard is buying crypto businesses and accepting payments in stablecoins. Major banks like Citi and JPMorgan are planning to create their own crypto systems and issue their own coins to compete with new crypto companies.

Trump is also actively pushing for the quick approval of the Clarity Act. This law would provide legal protection for many crypto businesses, allowing them to issue and trade more speculative assets like bitcoin with fewer regulations.

Some experts warn that stablecoins could be risky. They believe that waiting to see how things develop with stablecoins might be a mistake. They argue that inviting crypto into the financial system, despite claims of technological progress, could create huge problems for the financial system.

As stablecoins become more common in the financial world, they will likely take money from other areas, possibly from foreign investors looking for dollar assets, but also from regular commercial banks. This might increase demand for government bonds, helping the government fund its debt, but it could also reduce the amount of money available for lending to the real economy.

The payment system is likely to change as many different private stablecoins compete for customers. Companies that issue stablecoins might be tempted to bend rules that require them to invest only in the safest assets to maintain their $1 value. Many may instead choose riskier investments. Experts point out that new companies will always find ways to operate outside of regulations. This situation could lead to problems similar to bank runs.

Even if most companies invest in safe government bonds, the system is not transparent and lacks a safety net, which could lead to chaos. If people panic and demand their money back, it could cause government bond prices to fall sharply, leading to higher interest rates and instability in financial markets and the entire economy.

Instead of allowing everyone to create private stablecoins, the government could consider having the Federal Reserve issue a digital dollar. This digital dollar would be fully backed by the US government, similar to the regular dollar. This would allow everyone to benefit from new technology without the risk of a major financial collapse.

However, the problem with this idea is clear: it would not offer the same chances for people like Trump to make billions of dollars.