The United States may become the global encryption center, but potential risks cannot be ignored.

With a series of important digital currency bills being passed or under consideration in the United States, the country is expected to become a major hub for cryptocurrency-related activities. However, proponents of the new legislation should proceed with caution to avoid counterproductive outcomes.

The encryption industry has gained significant political influence through political donations and other means, leading to new legislation being designed to hinder reasonable regulation. This could trigger an unprecedented boom-bust cycle.

Historically, the main advantage of the U.S. financial markets has been their high level of transparency, allowing investors to better understand risks and make informed decisions. The U.S. has also established strict anti-conflict of interest regulations that require fair treatment of investors and limit the risks that financial companies can take.

This framework did not form by chance, but is the result of wise laws and regulations established after the Great Depression of the 1930s, and has continued to evolve since then. These rules are a primary reason why the United States has become a friendly environment for entrepreneurship and innovation.

Although individual entrepreneurs or emerging industries may be dissatisfied with these rules, the risks brought about by financial innovation affect the entire financial system. The focus of regulation is to protect the overall interests, not just those of individual investors.

Many major economies have experienced severe financial turmoil and even systemic collapse. The Great Depression, which began with the stock market crash in 1929, is a typical example that destroyed the wealth and dreams of millions of Americans. Avoiding a repetition of history has always been an important policy goal.

However, the newly passed bill seems to have not fully considered this goal. The bill creates a framework for stablecoins issued by domestic and foreign companies. Stablecoins are an important emerging digital asset designed to maintain a stable value relative to a specific currency or commodity (usually the US dollar). They play a significant role in cryptocurrency trading.

The business model of stablecoin issuers is similar to that of banks, as they earn interest rate spreads by investing reserve funds. The new legislation may encourage issuers to invest a portion of their reserves in high-risk assets for higher returns, which will become a major source of system vulnerability.

From a systemic perspective, the new legislation fails to effectively address the inherent redemption risks of stablecoins, as it prevents regulators from establishing robust capital, liquidity, and other safeguards.

When stablecoin issuers face difficulties, how can we prevent the problem from spreading to the real economy? Simply applying bankruptcy laws to failed stablecoin issuers may result in significant losses for investors and could trigger a run on other issuers.

It is worth noting that the new law allows foreign issuers to invest their reserves in non-dollar assets such as high-risk government debt of their own country. This could lead to asset mismatches and trigger liquidity crises and solvency concerns when the dollar appreciates significantly.

The greater hidden danger is that if the Senate passes similar bills, it may condone conflicts of interest and self-serving transactions, to an extent not seen in nearly a century. In addition, the new legislation may facilitate the use of stablecoins and even broader encryption for illegal financial transactions, raising national security concerns.

Although the United States may become a global encryption center, the rush of Congress to cater to the demands of the encryption industry exposes both the United States and the world to the real risks of a financial panic reoccurring. This could lead to severe economic damage, resulting in mass unemployment and the evaporation of wealth. Therefore, it is crucial to balance innovation and risk control when advancing encryption legislation.