Nobel laureate Krugman warns stablecoins pose financial risks

Nobel laureate economist Paul Krugman has expressed skepticism about the utility of stablecoins, asserting that they serve no clear practical function. In a May 30 blog post, Krugman argued that stablecoins cannot be used for ordinary purchases and that their only advantage over traditional payment methods is anonymity, which he believes facilitates criminal activities such as money laundering and the purchase of illegal drugs.

Krugman compared stablecoin issuers to antebellum banks, which were private and unregulated institutions that issued their own paper notes before the U.S. federal government started printing paper currency. He suggested that stablecoins are a modern version of these antebellum notes, backed by the claim that they are supported by U.S. dollars. Krugman also likened stablecoins to 'shadow banks' that evaded precautionary regulation, contributing to the 2008 financial crisis.

Krugman further criticized lawmakers backing the U.S. stablecoin bill, known as the GENIUS Act, suggesting that some of them are aware of how stablecoins can facilitate crime but are motivated by campaign contributions and personal wealth. He warned that the growth of stablecoins poses new risks to overall financial stability, as a rush of users redeeming their stablecoins for U.S. dollars could force issuers into a "fire sale" of treasury bills, raising interest rates and threatening the financial stability of the entire economy.

Nic Carter, co-founder of blockchain data aggregator Coin Metrics and general partner at Castle Island Ventures, disagreed with Krugman's views. Carter argued that Krugman is "remarkably misinformed" about stablecoins and that the more than 100 million people who use stablecoins would disagree with Krugman's claim that they have no utility. Paul "Teddy" Fusaro, president of crypto asset manager Bitwise Asset Management, also criticized Krugman's claims, suggesting that Carter's description of Krugman as "remarkably misinformed" is generous.

In summary, the debate between Krugman and Carter highlights the differing views on the utility and risks of stablecoins. While Krugman sees them as facilitating criminal activities and posing risks to financial stability, Carter and Fusaro argue that stablecoins have practical uses and are beneficial to a large number of users. The disagreement underscores the need for further discussion and regulation of stablecoins to address their potential risks and benefits.