The Economist - USA (2022-05-21)

The Economist May 21st 2022 Leaders 13

However crypto is top of the list of speculativeassetsreceiv­

ing  a  drubbing.  The  sell­off  has  exposed  glaringweaknesses.

Consider  terra,  an  “algorithmic”  stablecoin,  whose value is

backed by another asset, supposedly making it dependable.On

paper,  users  could  redeem  $1  of  terra  for  $1  worthofanother

cryptocurrency, luna, which would be issued tomeetdemand.

But luna’s price began to slide in early May, puttingpressureon

the terra peg. There was a rush to redeem. As luna’ssupplybal­

looned, its price collapsed. On May 10th 350m lunatokensexist­

ed; now 6.5trn do. At its peak, luna was worth $40bnandsup­

ported $18bn of terra. Now it is worthless, and terraistradingat

10 cents. In hindsight the scheme looks mad.

At  the  other  end  of  the  spectrum  is  usdc,  a

stablecoin  backed  by  cash  and  short­dated

Treasury  bills  which  publishes  audited  finan­

cial statements each month. It has done fine. So

has  dai,  another  stablecoin  that  is  backed  by

crypto  and  run  by  algorithms.  It  has  a  decent

degree  of  transparency  and  holds  at  least  1.

times as much backing as it needs. The supply

of  the  cryptocurrencies  it  relies  on—usdcand  ether—is  inde­

pendently controlled. 

In the middle of these two extremes is tether, the biggest sta­

blecoin, which briefly dipped below its par value of $1 per token

on  May  12th.  It  says  it  is  backed  by  assets  like  cash,  Treasuries

and corporate debt, but its disclosure is awful. Tether refuses to

reveal the precise asset mix, claiming this is its “secret sauce”. It

has  previously  been  fined  by  New  York’s  attorney­general  for

misleading investors. As the broader market sell­off in the past

weeks  has  intensified,  its  holders  have  rightly  grown  nervous.

Since  it  slipped  from  its  peg,  tether  holders  have  redeemed

about$9bn­worthoftokens,approximately10%ofthetotal.

Investorsarenowdoingwhattheyaresupposedto:penalis­

inginstrumentsthatarefundamentallyflawedorissuedbyor­

ganisationsthatarebadlyrun.Yetthesell­offhassparkedre­

newedcallsforthegovernmenttostepin.Consumersarein

dangerofbeingrippedoff.Andvolatilitycouldyetspilloverinto

theconventionalfinancialsystem.Forexample,tetherisa key

partofthecrypto­plumbingandthemostliquidbasecurrency

fortradingbetweenothercryptoassets,andbetweencryptoand

conventionalones.Ifit failedthefalloutwouldbebigger.

Somecriticswouldlikethecryptosystembanned;others

wouldlikeitheavilyregulated,justasbanks

are;stillotherswantregulationbutfearthat

thismightbeinterpretedasanofficialendorse­

ment.Thetroubleisthat adraconiancrack­

downwouldputatriskthebenefitsthatcrypto

eventuallypromises,includingnewfinancial

productsthatbypassstodgybanks;innovations

inpropertyrights;andthepossibilityofa less

centralised financial system. 

So what should governments do? The best path would be to

accelerate the process of sorting that is under way. Key to this is

more  reliable  information  so  that  retail  users  and  institutions

can  guard  more  effectively  against  fraud.  In  particular,  stable­

coins  should  be  forced  to  disclose  their  backing—what  the  as­

sets are, where they are held and who controls them. Some cryp­

to ventures based outside America are beyond easy reach of its

regulators, but Uncle Sam could require the big crypto exchang­

es in America, which are already regulated, to flag which tokens

have met disclosure standards. The saying thatspringsto mind

is “Help the market sort the wheat from the chaff”.n

Cryptocurrencies

Total market capitalisation, $trn

3

2

1

0

2020 21 22

C

ongressional dysfunction can  cause  chaos  in  America.

Look at illegal immigration, where the law strands 10.5m un­

authorised migrants in limbo, with little chance of deportation

or the legal status that confers the right to work. In the absence

of legislation, presidents oscillate wildly. Barack Obama sought

to  declare  almost  half  of  the  unauthorised  population  exempt

from deportation and eligible to work. Donald Trump turned the

screws the other way, and tried deterring migrants by heartlessly

separating parents from children. President Joe Biden is facing

dissent  from  Democrats  fearful  of  Republican  attacks  if,  as

planned, he ends a pandemic­response measure called Title 

on  May  23rd.  This  lets  American  border  police  expel  asylum­

seekers and other migrants on public­health grounds. 

America’s federalist system wisely leaves much room to the

states to act as laboratories. But state experimentation on immi­

gration  has  gravitated  to  the  extremes.  In  some  Republican

states the aim seems to be cruelty for its own sake. Greg Abbott,

the  governor  of  Texas,  has  suggested  that  the  Supreme  Court

should reverse precedent and remove the obligation to educate

illegal children, as if that would do anybody any good. 

Democratic  states,  by  contrast,  have  opted  to  spend  money.

They  are  expanding  welfare  benefits  for  their  illicit  residents

(see United States section). New York, which in 2019 began issu­

ing  driving  licences  to  residents  in  the  state  illegally,  set  up  a

$2.1bn  fund  to  provide  unemployment  benefits  and  pandemic

relief.  Three  years  ago  California  expanded  Medicaid,  the  gov­

ernment  health­insurance  programme  for  the  poor,  to  include

young irregular residents. Its governor, Gavin Newsom, wishes

to offer the programme to all, regardless of immigration status. 

America  is  an  outlier.  In  Europe  and  elsewhere  access  to

benefits  is  limited  to  citizens  or  legal  immigrants—who  often

have to wait for several years to be eligible. You would not expect

Bavaria  to  sponsor  Syrian  migrants  that  the  German  interior

ministry had turned away, or councils in London to offer hous­

ing benefits to adults who are in Britain illegally. It is Congress’s

lack of will to deal with illegal immigration in America that ex­

plains  the  urge  in  California  and  New  York  to  do  something

about  their  permanent  shadow­class.  Despite  vigorous  efforts,

one­tenth of California’s non­elderly population lacks health in­

surance. Of that group, the illegal immigrants account for 40%.

Alas, these efforts are likely to be yet another stop­start mea­

sure.  Because  most  federal  laws  ban  spending  on  illegal  resi­

dents,  states  must  fund  the  expanded  services  without  federal

subsidies. At present, their budgets are swollen by a strong re­

America’s states are drifting apart over illegal immigration

State of disarray

Immigration