Stablecoins are bank deposits

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Stablecoins: No need for geniuses

The Stablecoin issuer is a bank, and Stablecoin is a bank deposit. This is not complicated. If you give me money and I invest it, and in return I will give you something that is responsible for me and an asset for you, and it is on demand and you can redeem it in a par, I am a bank and what I handed you to you is a deposit. It doesn’t matter whether it acts as a mediator in the crypto market or as a token for a cross-border payment app, whether you get gumballs from a gumball machine. I am a bank, you are a depositor and we are in this together.

With these facts in mind, some developments over the past 1-2 weeks will become more clear. One was reported by the Wall Street Journal:

The country’s largest bank is exploring whether to team up to issue joint stubcoins, a step aimed at dodging escalating competition from the cryptocurrency industry. . . Banks are becoming brave as stubcoins are widely adopted under President Trump and could siphon the deposits and transactions they process. . . Banks see opportunities to speed up more routine transactions, such as cross-border payments that could take days with traditional payment systems.

There are no surprises here. The new wave of emerging banks has developed a pitch that consumers like. Usually, in these circumstances, legacy banks will scream to be crushed by a mountain of regulations where they themselves work (or you are protected if you wish). But startups seem to have a political advantage. So if you can’t beat, join ’em.

The second news is that the genius (guiding and establishing national innovation for the US stubcoin) accomplished it through a key procedural vote in the Senate. Knowing that Stablecoins is a bank deposit, you can easily see the laws about what it is. A new kind of bank light touch regulation framework. It’s not a “narrow bank” but rather (you can find out what it is) it’s kind of “bank light” of sorts.

A central feature of the current written law is the requirement to support deposits/stubcoins 1:1 by any of the following reserve assets: US dollars, US central bank reserves, “demand deposits… at insurance deposit institutions”, “requirements for 93 days of treasury or repo repo ums bill repo other permitted assets.

There is also a requirement for monthly disclosure of reserves and annual audits for issuers of more than $50 billion in coins. The Act also believes that Stablecoin regulators should issue regulations covering capital requirements, diversification of reserve assets and risk management (for non-banks, the regulator will become the director of currency at least at the federal level). But that’s not saying what those regulations should be.

It is impressive that the law specifies stablecoin as “not a deposit.” For example, if it’s quoting like a duck. The law also surprised that Stabrecoin claims “does not provide yields or benefits payments.” There are two ways to see this latter point. You might say it’s handouts to the crypto industry. Who doesn’t want to run a bank that is legally prohibited from interest on depositors? On the other hand, you may view it as a safeguard. If the issuer is not allowed to invest in long-term, high-yield assets, then it is better for industry solutions that they are not competing in yields.

With this sketch in mind, there are two big questions. Are these new types of banks at risk of being called Stablecoin issuers? And will they solve the problems that need to be solved?

Stephen Kelly of the Yale Program on Financial Stability reminded us that one source of risk is the issuer’s deposits in what ACT calls “insured depositories.” The problem is that FDIC insurance doesn’t cover institutions at all. Applies to deposits only and costs up to $250,000. We saw how this didn’t work when Circle, the publisher of USDC Stablecoin, discovered that there was a $3.3 billion reserve deposit that was deposited at Silicon Valley Bank when it failed. The USDC holder, along with other SVB depositors, will be bailed out by the US government. The bank is viable, the reserves of Stablecoins may be bank deposits, and Stablecoins are viable.

This law can be amended to limit the coin reserve to only Treasury bills. But Kelly points out, this is:

It will become like a government money market fund, but it can become messy 1) If it is truly used for payment, the bank reserves must resolve withdrawals from the crypto.

That’s all for the risk. What about the benefits? It is true that not only domestic payments (as Brookings’ Aaron Klein emphasizes), but also current payment systems are too late. The question is whether personal issued stubcoins are the right technology to solve this problem.

This will bring you back to where you started with the bank. Using publicly agreed blockchain technology, they assume tokenized sediments (with the Fed). This allows you to capture the benefits of stubcoins on both speed and transparency, without having to go in and out of intermediary currency. Stablecoins can return to their original purpose. It acts as a chip for cryptocurrency casinos.

One good read

A careless day for young people.