His analysis is deeply unsettling.
The United States is in the middle of a financial experiment. If it goes wrong, it could end in a financial crisis 2.0.
We are talking about the very core of the American monetary system. Stablecoins are gaining ground at an accelerating pace. A digital currency that has become such a significant threat that it has now prompted leading economist Adam Posen to issue stark warnings about the direction of travel. “I am fundamentally very worried about financial stability in the United States,” says Adam Posen, president of the influential and independent Peterson Institute for International Economics in Washington.
Posen belongs to a class of economists who do not need to raise their voice or draw dramatic conclusions to attract attention. Attention comes naturally. He is among the world’s foremost experts on monetary policy, currencies and interest rates, and he played a key role at the Bank of England in the years following the global financial crisis.
“You can have volcanoes in the economy that you haven’t seen yet,” Posen says, referring to a poem by the American poet Emily Dickinson. Dickinson used the term “volcanoes” to describe hidden dangers—risks that exist beneath the surface but are difficult to detect. According to Posen, stablecoins are one such volcano: a latent threat that could erupt and trigger a financial meltdown. The lava, he warns, could cause destruction reminiscent of what happened in 2008. Back then, subprime mortgages and complex mortgage-backed securities were widely regarded as safe. They were not. Now Posen asks the question: Are we making the same mistake with stablecoins?
A Recipe for Crisis
The American economist is not alone in his concerns. Others, too, have begun to notice the volcano. Recently, influential Financial Times columnist Martin Wolf published an article titled “Why the world should fear stablecoins.” Nobel Prize–winning economist Jean Tirole has said he is “very, very worried” about the supervision of stablecoins. He, too, fears an eruption—one that could require massive government bailouts, just as during the financial crisis. In December, the International Monetary Fund (IMF) published the report Understanding Stablecoins, warning that the digital currency involves “significant risks.”
“All of this is a recipe for something that could end very badly,” says Adam Posen. He points to a series of troubling developments currently unfolding in the United States. First and foremost, members of Donald Trump’s family and several political allies have invested large private sums in the stablecoin industry. This is not illegal, but it can have unfortunate consequences when politics and money become intertwined. Many investors may look at stablecoin companies and conclude: If a crisis hits, these firms will likely be rescued by the government—after all, politicians have their own money at stake. That belief can create a dangerous dynamic. “You get overinvestment, you get a financial bubble, and potentially an even worse collapse,” Posen warns.
At the same time, the Trump administration has attacked the independent regulatory agencies responsible for overseeing the financial sector—institutions meant to detect problems before they spiral out of control. That is the next item on Posen’s growing list of concerns. “The reason we have regulation is to prevent things from going wrong,” he says. He notes that Congress did, in fact, pass the so-called GENIUS Act over the summer—an initial attempt to regulate stablecoins and establish a legal framework. But Posen is unimpressed. “I simply don’t understand why they call it genius,” he says, pointing out that stablecoin issuers are subject to far less regulation and supervision than traditional banks.
A Dangerous Combination
Posen also believes that stablecoin companies are misleading the public. Stablecoins are marketed as safe because they are backed by US Treasury bonds. In principle, the mechanism works as follows: If you exchange one dollar for a stablecoin, that dollar is invested in government bonds—typically with short maturities. This is supposed to guarantee that you can always redeem your money. US Treasuries are widely considered among the safest assets in the world.
But there is a critical caveat. The private companies issuing stablecoins often engage in other business activities as well, including exposure to cryptocurrencies—assets that are far more volatile and risky. According to Posen, this creates the potential for dangerous cross-selling, where companies offer a product that appears safe while simultaneously promoting far riskier investments. That should set off alarm bells. How does a company truly separate the safe from the risky when it operates with one balance sheet? “I am very concerned about this, because we have seen it before—and it can end badly,” Posen says. Trust, he stresses, is absolutely central to stablecoins and the firms that issue them.
From Rumors to Crisis
If trust evaporates, the result can be a financial crash. What could undermine confidence? Rumors that a stablecoin issuer is in trouble. Concerns about insufficient liquidity. Losses tied to crypto markets. If investors panic, they will rush to redeem their stablecoins. The result is a queue at the exit—a bank run in digital form. To meet redemptions, stablecoin companies would have to sell their holdings of government bonds. That would increase selling pressure in the bond market, pushing yields sharply higher and potentially triggering a broader financial meltdown. Rising yields would hit everyone holding bonds. Forced selling would follow. Yields would climb further.
The consequences are well known: Rapid and sharp increases in interest rates paralyze the economy, crush consumption and investment, and trigger recession. Equity markets collapse.
There have already been warning signs. In 2023, following the collapse of Silicon Valley Bank, the stablecoin USD Coin came under pressure because it held deposits at the bank. Investors panicked and rushed to withdraw funds. Trust took a hit. Credit rating agency S&P has also urged caution. Not long ago, it labeled Tether, one of the largest stablecoin issuers, as “weak” after assessing the company’s credit profile.
During the financial crisis, banks were described as “too big to fail.” Governments and central banks stepped in with massive liquidity injections to prevent systemic collapse. With stablecoin issuers, Posen sees a different—but equally troubling—problem: “Too connected to fail.” These companies are politically connected, with private money linked to the White House. More importantly, stablecoins are tied directly to US government debt, making them fundamental to the broader American economy.
How Big Can This Get?
Today, the stablecoin sector is worth around $280 billion. That may seem modest. But by 2028, the figure could reach $2 trillion, according to British bank Standard Chartered. The US Treasury believes it could grow to $3 trillion by 2030. "If we reach that kind of scale, we are talking about something that carries significant weight in the financial sector, and there will be people who start to worry about whether we are creating a shadow banking sector alongside the traditional and regulated banking system," says Jens Nærvig Pedersen, chief analyst at Danske Bank, who has followed digital currencies for the past five years.
He is not as concerned as Adam Posen when it comes to developments in stablecoins. In fact, he believes that stablecoins and the underlying technology hold significant potential.
That said, the chief analyst argues that it is important to keep a close eye on what is happening in that part of the economy:
"Are risks being built up that no one is paying attention to? Are some companies taking on excessive risk? What happens if the house of cards starts to collapse?," says Jens Nærvig Pedersen.
The Promise—and the Political Dilemma
There are reasons why stablecoins could become large and important—both in the United States and globally. In the United States, credit card payments are expensive—around five times more costly than in Europe. Many Americans may welcome a cheaper, faster and more transparent payment system. Stablecoins could potentially be the innovation the banking system needs. In other countries, distrust of central banks and domestic currencies is widespread, while smartphone adoption is high. This creates fertile ground for parallel monetary systems based on stablecoins, which may appear safer and more credible.
The US government, meanwhile, has a strategic interest: Widespread adoption of stablecoins could help address one of America’s most pressing problems—its enormous national debt and budget deficit. How? The greater the demand for stablecoins, the greater the indirect demand for US Treasuries. That would push yields down, making it cheaper for the US government to service and issue debt.
One of the strongest advocates of this idea is Stephen Miran, a former top economic adviser to Trump, now a member of the Federal Reserve’s rate-setting committee and the architect of the so-called Mar-a-Lago Accord. “My thesis is that stablecoins are already increasing demand for US Treasuries,” Miran said in a speech in November. “All else equal, this new demand makes it cheaper for the US government to borrow.” Miran argues that widespread stablecoin adoption could lower interest rates by as much as 0.4 percentage points.
A Nightmare Scenario
The Trump administration appears determined to build a stablecoin industry to ease the debt burden—and perhaps secure significant private returns along the way. But what happens if there is a change in government? What if a future administration becomes deeply concerned about stablecoins? “It is very hard to reverse once this is in motion,” says Adam Posen. Looking ahead, he sees two possible paths—and neither is encouraging. One option is for the government to state clearly that it will not rescue the stablecoin industry if it gets into trouble. No bailouts. “In that scenario, you can easily imagine panic setting in as people rush to withdraw their money,” Posen says.
The alternative? Politicians do nothing. They sit on their hands. The bubble grows larger and larger. That avoids immediate panic. But the longer problems are ignored, the bigger the bubble—and the more severe the eventual collapse. “A potential nightmare,” says Adam Posen.
Correction: An earlier version of this article omitted Jens Nærvig Pedersen’s full comments due to an incomplete translation provided.