Paul Krugman Slams Stablecoins as Useless and Risky

Krugman Says Stablecoins Have No Real Purpose

Paul Krugman, a Nobel Prize-winning American economist, recently shared strong criticism of stablecoins. In his blog post titled “Digital Corruption Takes Over DC,” he questioned why anyone would choose stablecoins over regular U.S. dollars. He said stablecoins can’t be used for regular purchases. In his view, they don’t offer anything that debit cards, Venmo, Zelle, or wire transfers can’t already do, and they do it more cheaply and more easily.

He believes people could just use U.S. dollars instead. To him, the supposed dollar backing behind stablecoins doesn’t add enough value. In fact, he suggested the only feature stablecoins really offer is anonymity.

Krugman pointed out that stablecoins are attractive because of the privacy they provide. But he believes this privacy has a downside. He wrote that this type of anonymity mostly appeals to criminals. People can use stablecoins to launder money, buy illegal drugs, or extort others.

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He summed it up by saying that the only real reason for stablecoins to exist is to make it easier for people to commit crimes. To Krugman, that’s not a valid reason for promoting or legitimizing these digital assets.

Krugman compared today’s stablecoin issuers to “wildcat banks” from the 1800s. Before the U.S. government printed paper currency in 1861, private banks would issue their own paper notes. These notes were backed by gold or silver and were used for daily transactions.

He said many of these early banks were set up to trick people. They were unregulated. When people lost trust, they rushed to exchange their notes, which led to bank failures. These events caused major problems for the economy at the time.

Krugman believes that stablecoins are just the modern version of those risky bank notes. The difference is that the antebellum bank notes served a purpose in the absence of federal currency. Stablecoins, he said, do not.

A New Type of Shadow Bank

In his blog, Krugman described stablecoins as part of the new “shadow banking” system. He referred to the 2008 financial crisis, where unregulated financial institutions played a major role. He said stablecoins are similar because they also try to work around financial regulations.

To him, stablecoin issuers are not just tech startups. They are operating like unregulated banks. They carry risks that could hurt the entire financial system. But they don’t have the oversight or structure that regular banks are required to have.

Krugman also criticized the GENIUS Act, a proposed bill in the U.S. that would regulate stablecoins. He questioned the motives of lawmakers who support the bill. He believes some of them know that stablecoins can be used for illegal activities. Still, they support the bill because of political donations or personal investments.

He wrote that it's hard for people to see the problem when their money depends on them not seeing it. This is a strong accusation. It suggests that financial interests are influencing lawmakers more than facts or public safety.

The Threat of a Stablecoin Bank Run

Stablecoin companies often claim their tokens are backed by U.S. Treasury bills. Krugman said this kind of backing might seem safe but is actually dangerous. If a large number of users try to redeem their stablecoins for dollars all at once, the issuers would have to sell a lot of government debt quickly. This could drive interest rates up and cause serious instability in the U.S. economy.

He described this situation as a potential “run on government debt.” In his view, all of this is happening just to make it easier for criminals to move money around. That’s not a good trade-off for the risks involved.

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Krugman ended his blog with a harsh judgment on Washington, DC. He said that even if the digital world hasn’t taken full control of politics, it has at least “bought and paid for” a large part of it. His words suggest that lawmakers are being influenced by crypto money rather than public interest.

Not everyone agrees with Krugman’s opinion. Nic Carter, the co-founder of Coin Metrics, said Krugman is misinformed. He pointed out that more than 100 million people use stablecoins. That, he said, proves they are useful.

Paul “Teddy” Fusaro, the president of Bitwise Asset Management, also disagreed. He said calling Krugman “remarkably misinformed” was actually being too kind.

The debate continues. Some see stablecoins as dangerous. Others see them as part of the future.