“The countdown clock on the next catastrophic crash has already started,” Dennis Kelleher, the president of the nonprofit Better Markets, told me.

In the past few weeks, I have heard that sentiment or similar from economists, traders, Hill staffers, and government officials. The incoming Trump administration has promised to pass crypto-friendly regulations, and is likely to loosen strictures on Wall Street institutions as well.

This will bring an unheralded era of American prosperity, it argues, maintaining the country’s position as the head of the global capital markets and the heart of the global investment ecosystem. “My vision is for an America that dominates the future,” Donald Trump told a bitcoin conference in July. “I’m laying out my plan to ensure that the United States will be the crypto capital of the planet and the bitcoin superpower of the world.”

[Annie Lowrey: The three pillars of the bro-economy]

Financial experts expect something different. First, a boom. A big boom, maybe, with the price of bitcoin, ether, and other cryptocurrencies climbing; financial firms raking in profits; and American investors awash in newfound wealth. Second, a bust. A big bust, maybe, with firms collapsing, the government being called in to steady the markets, and plenty of Americans suffering from foreclosures and bankruptcies.

Having written about bitcoin for more than a decade—and having covered the last financial crisis and its long hangover—I have some sense of what might cause that boom and bust. Crypto assets tend to be exceedingly volatile, much more so than real estate, commodities, stocks, and bonds. Egged on by Washington, more Americans will invest in crypto. Prices will go up as cash floods in. Individuals and institutions will get wiped out when prices drop, as they inevitably will.

The experts I spoke with did not counter that narrative. But if that’s all that happens, they told me, the United States and the world should count themselves lucky. The danger is not just that crypto-friendly regulation will expose millions of Americans to scams and volatility. The danger is that it will lead to an increase in leverage across the whole of the financial system. It will foster opacity, making it harder for investors to determine the riskiness of and assign prices to financial products. And it will do so at the same time as the Trump administration cuts regulations and regulators.

Crypto will become more widespread. And the conventional financial markets will come to look more like the crypto markets—wilder, less transparent, and more unpredictable, with trillion-dollar consequences extending years into the future.

“I have this worry that the next three or four years will look pretty good,” Eswar Prasad, an economist at Cornell and a former International Monetary Fund official, told me. “It’s what comes after, when we have to pick up the pieces from all the speculative frenzies that are going to be generated because of this administration’s actions.”

For years, Washington has “waged a war on crypto and bitcoin like nobody’s ever seen,” Trump told crypto entrepreneurs this summer. “They target your banks. They choke off your financial services … They block ordinary Americans from transferring money to your exchanges. They slander you as criminals.” He added: “That happened to me too, because I said the election was rigged.”

Trump is not wrong that crypto exists in its own parallel financial universe. Many crypto companies cannot or choose not to comply with American financial regulations, making it hard for kitchen-table investors to use their services. (The world’s biggest crypto exchange, Binance, declines even to name which jurisdiction it is based in; it directs American customers to a smallish U.S. offshoot.) Companies such as Morgan Stanley and Wells Fargo tend to offer few, if any, crypto products, and tend to make minimal, if any, investments in crypto and crypto-related businesses. It’s not so much that banks haven’t wanted to get in on the fun. It’s that regulations have prevented them from doing so, and regulators have warned them not to.

This situation has throttled the amount of money flowing into crypto. But the approach has been a wise one: It has prevented firm failures and crazy price swings from destabilizing the traditional financial system. Crypto lost $2 trillion of its $3 trillion in market capitalization in 2022, Kelleher noted. “If you had that big of a financial crash with any other asset, there would have been contagion. But there wasn’t, because you had parallel systems with almost no interconnection.”

Forthcoming regulation will knit the systems together. Granted, nobody knows exactly what laws Congress will pass and Trump will sign. But the Financial Innovation and Technology for the 21st Century Act, or FIT21, which passed the House before dying in the Senate last year, is a good guide. The law was the subject of intense lobbying by crypto advocates with billions on the line and cash to spend, including $170 million on the 2024 election. It amounts to an industry wish list.

FIT21 makes the Commodity Futures Trading Commission, rather than the Securities and Exchange Commission, the regulator of most crypto assets and firms and requires that the CFTC collect far less information from companies on the structure and trading of crypto products than securities firms give the SEC.

[Annie Lowrey: The Black investors who were burned by Bitcoin]

Beyond loose rules, financial experts anticipate loose enforcement. The CFTC predominantly oversees financial products used as hedges by businesses and traded among traders, not ones hawked to individual investors. It has roughly one-fifth the budget of the SEC, and one-seventh the staff. And in general, Washington is expected to loosen the strictures preventing traditional banks from keeping crypto on their books and preventing crypto companies from accessing the country’s financial infrastructure.

According to Prasad, this regime would be a “dream” for crypto.

Trump and his family are personally invested in crypto, and the president-elect has floated the idea of establishing a “strategic” bitcoin reserve, to preempt Chinese influence. (In reality, this would mean deploying billions of dollars of taxpayer money to soak up speculative assets with no strategic benefit to the United States.) How many Republicans will invest in crypto because Trump does? How many young people will pour money into bitcoin because his son Eric says its price is zooming toward $1 million, or because the secretary of commerce says it is the future?

Nothing being considered by Congress or the White House will reduce the inherent risks. Crypto investors will remain vulnerable to hacking, ransomware, and theft. The research group Chainalysis tallied $24.2 billion in illicit transactions in 2023 alone. And if the U.S. government invests in crypto, the incentive for countries such as Iran and North Korea to interfere in the markets would go up exponentially. Imagine China engaging in a 51 percent attack on the bitcoin blockchain, taking it over and controlling each and every transaction. The situation is a security nightmare.

Americans will be exposed to more prosaic scams and rip-offs too. The SEC has brought enforcement actions against dozens of Ponzi schemers, charlatans, and cheats, encompassing both the $32 billion sham-exchange FTX and ticky-tacky coin firms. Nobody expects the CFTC to have the muscle to do the same. And FIT21 leaves loopholes open for all kinds of scuzzy profiteering. A crypto firm might be able to run an exchange, buy and sell assets on its own behalf, and execute orders for clients—legally, at the same time, despite the conflicts of interest.

Simple volatility is the biggest risk for retail investors. Crypto coins, tokens, and currencies are “purely speculative,” Prasad emphasized. “The only thing anchoring the value is investor sentiment.” At least gold has industrial uses. Or, if you’re betting on the price of tulip bulbs, at least you might end up with a flower.

With crypto, you might end up with nothing, or less. A large share of crypto traders borrow money to make bets. When leveraged traders lose money on their investments, their lenders—generally the exchange on which the traders are trading—require them to put up collateral. To do that, investors might have to cash out their 401(k)s. They might have to dump their bitcoin, even in a down market. If they cannot come up with the cash, the firm holding their account might liquidate or seize their assets.

A report released last month by the Office of Financial Research, a government think tank, makes clear just how dangerous this could be: Some low-income households are “using crypto gains to take out new mortgages.” When crypto prices go down, those families’ homes are going to be at risk.

Many individual investors do not seem to understand these perils. The Federal Deposit Insurance Corporation has had to warn the public that it does not protect crypto assets. The Financial Stability Oversight Council has raised the concern that people do not realize that crypto firms are not subject to the same oversight as banks. But if Trump is invested, how bad could it be?

Regulators and economists are not worried primarily about the damage that this new era will do to individual households, however. They are worried about chaos in the crypto markets disrupting the traditional financial system—leading to a collapse in lending and the need for the government to step in, as it did in 2008.

Where Wall Street once saw fool’s gold, it now sees a gold mine. Ray Dalio of Bridgewater called crypto a “bubble” a decade ago; now he thinks it is “one hell of an invention.” Larry Fink of BlackRock previously referred to bitcoin as an “index of money laundering”; today he sees it as a “legitimate financial instrument”—one his firm has already begun offering to clients, if indirectly.

Early in 2024, the SEC began allowing fund managers to sell certain crypto investments. BlackRock launched a bitcoin exchange-traded fund in November; one public retirement fund has already staked its pensioners’ hard-earned cash. Barclays, Citigroup, JPMorgan, and Goldman Sachs are doing crypto deals too. Billions of traditional-finance money is flowing into the decentralized-finance markets, and billions more will as regulators allow.

[Charlie Warzel: Crypto’s legacy is finally clear]

What could go wrong? Nothing, provided that Wall Street firms are properly accounting for the risk of these risky assets. Everything, if they are not.  

Even the sturdiest-seeming instruments are dangerous. Stablecoins, for example, are crypto assets pegged to the dollar: One stablecoin is worth one dollar, making them useful as a medium of exchange, unlike bitcoin and ether. Stablecoin companies generally maintain their peg by holding one dollar’s worth of super-safe assets, such as cash and Treasury bills, for every stablecoin issued.

Supposedly. In the spring of 2022, the widely used stablecoin TerraUSD collapsed, its price falling to just 23 cents. The company had been using an algorithm to keep TerraUSD’s price moored; all it took was enough people pulling their money out for the stablecoin to break the buck. Tether, the world’s most-traded crypto asset, claims to be fully backed by safe deposits. The U.S. government found that it was not, as of 2021; moreover, the Treasury Department is contemplating sanctioning the company behind tether for its role as a cash funnel for the “North Korean nuclear-weapons program, Mexican drug cartels, Russian arms companies, Middle Eastern terrorist groups and Chinese manufacturers of chemicals used to make fentanyl,” The Wall Street Journal has reported. (“To suggest that Tether is somehow involved in aiding criminal actors or sidestepping sanctions is outrageous,” the company responded.)

Were tether or another big stablecoin to falter, financial chaos could instantly spread beyond the crypto markets. Worried investors would dump the stablecoin, instigating “a self-fulfilling panic run,” in the words of three academics who modeled this eventuality. The stablecoin issuer would dump Treasury bills and other safe assets to provide redemptions; the falling price of safe assets would affect thousands of non-crypto firms. The economists put the risk of a run on tether at 2.5 percent as of late 2021—not so stable!

Other catastrophes are easy to imagine: bank failures, exchange collapses, giant Ponzi schemes faltering. Still, the biggest risk with crypto has little to do with crypto at all.

If Congress passes FIT21 or a similar bill, it would invent a novel asset class called “digital commodities”—in essence, any financial asset managed on a decentralized blockchain. Digital commodities would be exempted from SEC oversight, as would “decentralized finance” firms. In the FIT21 bill, any firm or person can self-certify a financial product as a digital commodity, and the SEC would have only 60 days to object.

This is a loophole big enough to fit an investment bank through.

Already, Wall Street is talking up “tokenization,” meaning putting assets on a programmable digital ledger. The putative justification is capital efficiency: Tokenization could make it easier to move money around. Another justification is regulatory arbitrage: Investments on a blockchain would move out of the SEC’s purview, and likely be subject to fewer disclosure, reporting, accounting, tax, consumer-protection, anti-money-laundering, and capital requirements. Risk would build up in the system; the government would have fewer ways to rein firms in.

Crypto regulation could end up undermining the “broader $100 trillion capital markets,” Gary Gensler, the soon-to-be-former head of the SEC and the crypto industry’s enemy No. 1, has argued. “It could encourage noncompliant entities to try to choose what regulatory regimes they wish to be subjected to.”

[Annie Lowrey: When the Bitcoin scammers came for me]

We have seen this movie before, not long ago. In 2000, shortly before leaving office, Bill Clinton signed the Commodity Futures Modernization Act. The law put strictures on derivatives traded on an exchange, but left over-the-counter derivatives unregulated. So Wall Street ginned up trillions of dollars of financial products, many backed by the income streams from home loans, and traded them over the counter. It packaged subprime loans with prime loans, obscuring a given financial instrument’s real risk. Then consumers strained under rising interest rates, crummy wage growth, and climbing unemployment. The mortgage-default rate went up. Home prices fell, first in the Sun Belt and then nationwide. Investors panicked. Nobody even knew what was in all of those credit-default swaps and mortgage-backed securities. Nobody was sure what anything was worth. Uncertainty, opacity, leverage, and mispricing spurred the global financial crisis that caused the Great Recession.

The crypto market today is primed to become the derivatives market of the future. Were Congress and the Trump administration to do nothing—to leave the SEC as crypto’s primary regulator, to require crypto companies to play by the existing rules—the chaos would remain walled off. There’s no sensible justification for digital assets to be treated differently than securities, anyway. By the simple test the government has used for a century, nearly all crypto assets are securities. But Washington is creating loopholes, not laws.

As the crypto boosters like to say, hold on for dear life. “A lot of bankers, they’re dancing in the street,” Jamie Dimon of JPMorgan Chase said at a conference in Peru last year. Maybe they should be. The bankers are never the ones left holding the bag.

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In a news conference today, President-Elect Donald Trump previewed his second-term approach to foreign policy. One theme was force: He didn’t rule out using the military to seize the Panama Canal or to acquire Greenland, and floated the idea of employing “economic force” to compel Canada to operate as an American state. Some of his ideas seem largely symbolic; at one point, he suggested renaming the Gulf of Mexico to the Gulf of America. But these statements also fall into what my colleague David Frum has called a zero-sum attitude toward the rest of the world. Either a foreign country is with Donald Trump—and ready to collaborate with American interests—or it is against him.

Trump’s transactional outlook has put foreign leaders in a difficult position—including Canadian Prime Minister Justin Trudeau, who announced his resignation yesterday. Trump has threatened in recent months to impose 25 percent tariffs on Canada, and he’s relished taunting the nation, repeatedly making comments about Canada joining the United States, including calling the prime minister “Governor Trudeau.” Almost immediately after Trudeau announced his decision yesterday, Trump wrote on Truth Social that the Canadian prime minister was stepping down because “many people in Canada LOVE being the 51st State,” and suggested that Trudeau had resigned in direct response to the threat of tariffs.

Trump is tying himself more to Trudeau’s resignation than he should. The prime minister’s downfall was rooted in factors that have bedeviled him for years: Canada has suffered from high inflation and cost of living, and Trudeau has also faced backlash over immigration. And though the first few years of Trudeau’s term came with progressive policy wins (and international celebrity), it also produced a series of ethical and personal scandals. His approval ratings have tanked in recent months.

Trudeau’s attempts to stay on good terms with Trump, including by visiting him at Mar-a-Lago, seemed to contribute to the perception among some on his staff that he was not equipped to handle a second Trump term. In a pointed resignation letter, Deputy Prime Minister Chrystia Freeland said that she was “at odds” with her boss over the best way forward, arguing that Canada needed to take Trump’s threats more seriously and not resort to “political gimmicks.” Freeland’s resignation, which came as a surprise, only hastened the prime minister’s downward trajectory; by this month, many of his allies were pushing him to step down. He will remain in office until a new party leader is selected later this year.

In Trump’s first term, Trudeau managed to frame himself as a progressive foil to Trump. The leaders had some open differences, and Trump did impose some tariffs at the time, a narrower set than what he is threatening now. But Trump’s policy agenda, especially at the start of his term, was less about antagonizing allies than it was about domestic and culture-war issues (and shortly after he started focusing on tariffs, the coronavirus pandemic derailed everything else). But the approach Trump seems to be taking in his next term posed a new challenge for Trudeau. If Trudeau’s “domestic political position had been just a little bit stronger,” David wrote to me in an email, “he might have tried to gamble on a confrontational policy—bad for the Canadian economy, yes, but good for his own survival.” President Claudia Sheinbaum of Mexico seems to be navigating a similar dilemma; she first threatened counter-tariffs in response to Trump’s warnings, then appeared to walk this back, stating that there was no possibility of a tariff war with America.

Trump is pleased with Trudeau’s demise right now. But in reality, the president-elect is making it harder for the U.S. to work productively with Canada in the future. Cooperating closely with the Trump administration may now become a political liability in Canada, David predicted, and Trudeau’s Liberal Party will seek to embarrass any future Conservative government that gets too close to Trump. Ultimately, David warned, Trump is playing a “dangerous game.”

Related:

America’s lonely future The political logic of Trump’s international threats

Here are four new stories from The Atlantic:

The new Rasputins Trump is facing a catastrophic defeat in Ukraine. Judge Cannon comes to Trump’s aid, again. The coming assault on birthright citizenship

Today’s News

A New York appeals court denied Donald Trump’s request to delay the sentencing hearing in his criminal hush-money case. Florida District Judge Aileen Cannon blocked the Justice Department from releasing Special Counsel Jack Smith’s final report on his investigations into Trump’s classified-documents case and election-interference case. The House passed a bill that would require ICE to detain undocumented immigrants charged with nonviolent and minor-level crimes.

Dispatches

Work in Progress: Republicans have promised to deliver “crypto-friendly regulations” that will supposedly “bring an unheralded era of American prosperity,” writes Annie Lowrey. But the clock is ticking on a crypto crash. The Weekly Planet: Climate models can’t explain what’s happening to Earth, Zoë Schlanger writes.

Explore all of our newsletters here.

Evening Read

Illustration by Stephan Dybus

The Agony of Texting With Men

By Matthew Schnipper

My friend’s boyfriend, Joe Mullen, is a warm and sweet guy, a considerate person who loves dogs and babies. When I see him in person, once every month or two, he makes a point to ask me what I’ve been up to, how my life is going. Joe is a big music fan, and we share a love of music made by weird British people. I once got excited for him to check out an artist I thought he’d like. So I asked him for his number, and later I sent him a Spotify link to an album. “Hi :) It’s Schnipper,” I wrote. “I think u would dig this guy’s stuff.” I figured this might be the first step into a portal of greater closeness, a relationship of our own. Man to man. Except it wasn’t, because Joe did not text me back.

Read the full article.

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Americans with dementia are grieving social media. Political whiplash in the American Southwest “Dear James”: My phone-call anxiety is out of control.

Culture Break

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Explore. Adaptations of Sherlock Holmes stories are exploding now that the detective is in the public domain. Critics believe that it should have happened decades ago, Alec Nevala-Lee writes.

Examine. At the Golden Globes, nobody had much to say about the presidential election—or politics at all, Hannah Giorgis writes.

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Stephanie Bai contributed to this newsletter.

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Children born into poverty are far more likely to remain poor in adulthood in the United States than in other wealthy countries. Why?

The stickiness of poverty in the U.S. challenges the self-image of a country that prides itself on upward mobility. Most scholarship on the issue tends, logically enough, to focus on conditions during childhood, including the role of government income transfers in promoting children’s development. These studies have yielded important insights, but they overlook one major reason why poverty in the U.S. is so much stickier than in peer countries: Americans born into poverty receive far less government support during their adulthood.

In a new study published in Nature Human Behaviour, my co-authors (Gøsta Esping-Andersen, Rafael Pintro-Schmitt, and Peter Fallesen) and I quantify the persistence of poverty from childhood to adulthood in the U.S. We find that child poverty in the U.S. is more than four times as likely to lead to adult poverty than in Denmark and Germany, and more than twice as likely than in the United Kingdom and Australia. These findings hold across multiple measures of poverty.

We also sought to understand why poverty is so much more persistent in the U.S., using more complete data on household incomes than past studies have generally used. Studies focused on the U.S. have found that strong social networks, high-quality neighborhoods, and access to higher education all facilitate social mobility, yet these factors also matter in other wealthy countries where mobility is notably higher. When it comes to upward mobility from childhood poverty, what separates the U.S. from the U.K., Australia, Germany, and Denmark is a robust set of public investments to reduce poverty’s lingering consequences for adults who were born to disadvantaged families. We calculate that if the U.S. were to adopt the tax-and-transfer generosity of its peer countries, the cycle of American poverty could decline by more than one-third.

[Annie Lowrey: The case for spending way more on babies]

Imagine a resident of the U.S. and a resident of Denmark who each grew up spending, say, half of their childhood in poverty. Our study finds that both children will be less likely to pursue higher education or work full-time in adulthood compared with children who didn’t grow up poor. But the Dane is more likely to receive unemployment benefits, means-tested income support, or a child allowance and is therefore far less likely to live in poverty as an adult. This tax-and-transfer insurance effect—or the role of the state in reducing adult disadvantages that stem from childhood poverty—matters more than other oft-studied characteristics, such as parental education or marital status, in shaping the U.S. disadvantage compared with peer nations.

We were surprised by some factors that did not explain the U.S.’s outlier status—in particular, the role of racial discrimination. We and others have documented how historic and ongoing discrimination affects racial differences in poverty rates. But racial discrimination does not appear to explain why poor children in the U.S. are so much likelier to also be poor adults. Black Americans are much more likely than white Americans to experience childhood poverty, but the white children who do grow up poor are just as likely to be poor in adulthood.

We were also struck by the fact that, when it comes to escaping childhood poverty, the differences between the U.S. and its peer countries are much larger than the differences between places within the U.S. As the economist Raj Chetty and his co-authors have shown, growing up in a high-mobility city such as San Jose, California, confers significant long-term benefits compared with growing up in a low-mobility city such as Charlotte, North Carolina. Our study reveals, however, that even in the most economically mobile places in the U.S., poverty is stickier from childhood to adulthood than it is in the U.K., Australia, Denmark, or Germany.

[Rogé Karma: A baffling academic feud over income inequality]

It might seem tautological to say that poor American children would be less likely to be poor as adults if the government gave them more money. But Americans still tend to treat the distribution of government benefits as a symptom of economic deprivation rather than a potential solution to it. Many academic studies of intergenerational disadvantage have used welfare benefits as a direct proxy of poverty. Our study, in contrast, emphasizes that receipt of well-designed government transfers can directly reduce the persistence of poverty. As recent proof of this claim, Americans do not even need to look abroad. In 2021, the expanded child tax credit brought the U.S. poverty rate to its lowest level ever recorded and had the American welfare state temporarily reducing poverty at the rate of Norway’s. After the benefit expansions expired in 2022, poverty and food hardship predictably increased. Evidence from the other high-income countries in our study suggests that the U.S.’s return to a more restrictive and targeted welfare state is unlikely to promote upward mobility from poverty.

Some people might argue that self-sufficiency—giving people the means to overcome poverty without government income assistance—should be the aim of government policy. That is a defensible perspective and policy aim, yet it is inconsistent with the fact that all high-income countries include government taxes and transfers when measuring poverty. Moreover, it implies that it is better for American children who were born into poverty—through no fault of their own—to stay poor in adulthood than to escape poverty thanks to government transfers.

Breaking the cycle of poverty is not merely about increasing families’ child-care support or promoting higher education to wayward teenagers; it also requires direct state effort to improve the ability of disadvantaged adults to meet their basic needs. The United States’ reluctance to do so largely explains why its poor children are more likely to become poor adults.