The recently enacted GENIUS Act, America’s new stablecoin law, was billed as a milestone in integrating crypto assets into the financial mainstream.
Stablecoin illusion: New rules leave risk
By mandating that stablecoins be backed by high-quality liquid assets and redeemable at a fixed dollar value, the legislation aimed to transform digital tokens such as USDT and USDC into credible, low-risk payment instruments.
Yet beneath the surface, significant vulnerabilities remain — with the potential to spread from crypto markets into the wider financial system.
Depegging Dangers: When $1 Stops Being $1
A central flaw lies in the redemption structure of most major stablecoins.
Although the GENIUS Act insists that coins be redeemable for a fixed dollar amount, issuers like Tether and Circle limit redemptions to approved institutional clients.
Retail holders, lacking this direct access, must trade on exchanges such as Binance or Coinbase — where market prices can diverge sharply from the $1 peg.
When institutional players withdraw from the market in times of stress, liquidity evaporates and stablecoins can “depeg.”
Such episodes are not theoretical. USDT fell to $0.90 in 2018 amid doubts over its reserves, while USDC plunged to $0.87 during the Silicon Valley Bank collapse in 2023.
Panic subsided only after US authorities guaranteed all SVB deposits, effectively rescuing Circle.
A similar collapse struck the algorithmic stablecoin USDe in October 2025, when escalating US–China trade tensions triggered a sell-off that drove the token down to $0.65.
Each incident underscores how fragile market confidence remains — and how easily the “stable” in stablecoin can disappear.
DeFi Lending: Leverage Without a Safety Net
The GENIUS Act prohibits stablecoin issuers from paying interest, but yield-hungry investors can still lend their tokens on decentralised finance (DeFi) platforms such as Aave or Morpho.
These platforms promise returns of around 4%, financed by borrowers using stablecoins to take highly leveraged bets on crypto assets.
In practice, these systems mimic unregulated banks, with high leverage and no deposit insurance. When crypto prices fall, collateral values plunge, triggering forced liquidations that can spiral into market-wide sell-offs.
A modest 5% price drop can push loans above liquidation thresholds, leading to mass deleveraging. On 10th October 2025, total crypto liquidations hit a record $20 billion.
Recent governance changes at Aave have further increased lender exposure by hard-coding the value of USDe to USDT, preventing liquidations even when USDe’s market price collapses.
Lenders could thus find themselves unable to withdraw funds — a digital echo of a frozen money-market fund.
The Illusion of Safety
Despite regulatory progress, stablecoins remain vulnerable to runs, depegging and leverage spirals.
The GENIUS Act creates an appearance of security without addressing the deeper systemic risks posed by DeFi lending and limited redemption access.
Unless these loopholes are closed, the next crypto shock could ripple far beyond digital assets — into the real economy itself. As they say up North, “sorry to piss on yer chips.”
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