Why Trump’s latest Truth should make TradFi twitchy

Donald Trump is having a busy week. In between masterminding a full-scale aerial and naval assault on the world’s third-largest producer of natural gas, he found time to publish a social media post that will have forced many a senior banker to take pause.

“The Genius Act is being threatened and undermined by the Banks, and that is unacceptable – We are not going to allow it,” he posted on his Truth Social account on March 3. 

The crypto industry and banks are locked in a lobbying tussle over new US rules on stablecoins – in particular, whether customers should be allowed to earn a yield on their stablecoin holdings. 

The Genius Act, signed into law last July, bans stablecoin issuers from paying interest or yield to customers. But the Act itself is not final. US prudential agencies, such as the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency, must now draw up rules to implement the Act. Indeed, the OCC issued a proposed rulemaking on February 25 focused on a regulatory framework for stablecoin issuance.

The Genius Act has a sister, the Clarity Act, which aims to assign supervisory oversight of crypto assets. But the Clarity Act is bogged down in the US Senate, as factions thrash out their differences. On one side, the banking industry is keen to ensure there is no backsliding on the ban on interest-paying stablecoin issuance in the Genius Act. On the other, the crypto industry argues customers are losing out if they are prevented from receiving any reward or yield for their stablecoin holdings.

In Tuesday’s post, Donald Trump – crucially – has come down on the side of crypto. “Americans should earn more money on their money. The Banks are hitting record profits, and we are not going to allow them to undermine our powerful Crypto Agenda,” he wrote.

This post would confirm a long-held suspicion among banks that Trump is comfortable pushing a crypto agenda at the expense of traditional finance, or TradFi. Trump’s warm embrace of digital assets is clear. He has launched his own meme coin, $TRUMP, which now has a market cap of just shy of $800 million, according to cryptocurrency exchange Coinbase. 

DeFi wants to disintermediate the banking industry, replacing many of the functions of traditional lenders and financial services firms

Trump’s free-wheeling, unconventional leadership style of populist politics has a lot in common with the shake-it-up ethos of crypto. Bitcoin and other digital currencies were born from an anti-establishment sentiment that came to the fore amid wider public disenchantment with the banking industry following the financial crisis. The founders of the cryptocurrency movement questioned why central banks and commercial lenders should be the gatekeepers of buying and selling in modern society. So, they built their own decentralised platforms using a permissionless blockchain, or distributed ledger. 

The movement has since spawned a new breed: the crypto bro. These are entrepreneurial risk-takers, attracted by the latest shiny new thing in finance. They see an opportunity to make a quick buck – Trump among them. Many have become billionaires through canny trading in the ultra-volatile and thinly regulated world of crypto.

But Trump’s alignment with the world of decentralised finance, or DeFi, will worry banks. DeFi wants to disintermediate the banking industry, replacing many of the functions of traditional lenders and financial services firms. 

More immediately, if US regulations allow the payment of yield on stablecoin holdings, thousands of customers may suddenly decide to withdraw their cash from ordinary bank accounts and transfer it to digital exchanges. Lenders would suffer a mass exodus of deposits, dispossessing them of much of their funding. Asset-liability management and other key treasury functions would be thrown into chaos. A major bank run could become a reality, causing a spike in systemic risk. 

In the longer term, a shift to decentralised, digital platforms represents an existential threat to traditional banks. Many seasoned executives will remember the cautionary tale of Kodak, the once-dominant photography firm that slid into bankruptcy after failing to adapt to digitisation. There are fears that TradFi firms will suffer a similar fate.

The US president has a love-hate relationship with TradFi. Throughout his career as a property mogul, big-name lenders such as Citibank and Merrill Lynch have supported his business, some profiting, others not. Deutsche Bank became the Trump Organization’s go-to lender for many years until the German bank cut ties with its client after the 2021 Capitol riot. Trump then turned to the little-known Axos Financial, which was an early internet-banking start-up, with now more than $25 billion in assets. Across the decades of his business dealings, Trump has gradually moved away from traditional lenders – or they have moved away from him. 

This shaky bond between Trump Tower and Wall Street does little to instil confidence within the banking industry that the president will stand up for its interests. Indeed, Trump is currently suing JP Morgan and its chief executive, Jamie Dimon, over alleged debanking.

There is the usual caveat: Trump’s position on any issue is liable to dramatically change depending on unknowable factors. Indeed, many observers now regard his flip-flopping as a considered tactic to wrong-foot opponents and benefit his negotiating position.

But bank lobbyists will have been feverishly voicing their concerns to lawmakers over the risks that unfettered liberalisation of crypto markets may bring. Unfortunately, it is becoming more apparent that the chief lawmaker isn’t listening.