Regulators should treat stablecoins like banks
economist.com
economist.com
DAI is immensely exciting. Stablecoins like DAI are interesting experiments that could powerfully create new online economies.
Blockchains like Ethereum are currently far more transparent than the state-sponsor US monetary system. I hope to live in a society where economic experiments can be executed, new lessons learned, and transparency maintained. If stablecoins are persecuted, the need for cryptographic zero-knowledge proofs will allow these systems to continue with far less transparency.
As a different matter, how can society say "2008 bad", which resulted in little economic progress, and then threaten problem solvers from making new solutions? Innovation is a hedge against regulator lethargy.
It's also 200% collateralised so USDC could go to zero (or freeze all of the DAI locked USDC) without breaking the peg on DAI
This is the part that excites me about Ethereum, and also scares me when I hear talk of "regulation" for the space. By definition, a lot of the projects on Ethereum are a LOT more transparent than the traditional finance world. I can interact with something like DAI, and see exactly what backs it at every second of every day. I have an idea of what would happen if certain assets that backed it dropped too quickly.
With most of the traditional finance world, it's all very grey and hidden. I'm told that there is regulation "protecting me", but in a lot of cases that regulation doesn't really accomplish its goal and instead acts as a moat.
The important stuff is not transparent. For example, how do you know that Tether is backed by real USD? That Binance isn’t manipulating prices via wash trades? That the promises made about various coins are being upheld? etc.
Crypto is reliving the era of https://en.wikipedia.org/wiki/Wildcat_banking
> With most of the traditional finance world, it's all very grey and hidden
What specifically are you referring to with “traditional finance”?
You are describing so called centralised finance (CeFi) whereas the most high quality Ethereum projects focus on decentralised finance (DeFi). DeFi tries to break any chains to opaque companies and have all actions happening transparently and auditable on-chain. However ones like Tether murky the waters a lot here.
How can you create anything of value¹ by limiting yourself to on-chain transactions?
If value is created, the transaction would cover something happening in parallel, and your transparency does not extend to that.
¹ I do not consider lotteries or similar zero-sum games as value creation, but those can be 100% on-chain.
Is there an actual problem that this solves?
Likewise, we also all choose to agree that the owner of a car or a piece of land is whoever holds legal title to that car or piece of land according to some records maintained by some government office. If you think you own my car, and you make a duplicate set of keys and drive away in my car, I can get men with guns to go try to stop you from doing that because the official record says it's my car. But if you're the repo man, and I miss enough car payments, you can get the men with guns to take your side instead of mine, according to a similar process involving trained professionals arguing in front of someone wearing a black robe.
So yeah, the actual value isn't on-chain. What the chain replaces is the system of implicitly trusted institutions keeping records and adjudicating disagreements. Sure, out there in the real world, you have my car, but it's the record keeping that helps the men with guns decide whether to let you keep it or throw you in a cage for the next few years.
I thought it was more about "too big to fail" attitudes preventing enforcement from being fairly applied to the largest participants.
At a broader level, there is most consensus on the idea that the key failure in 2008 was that no one--neither investors nor creditors nor credit-rating agencies nor regulators--correctly understood the risk profiles of the new financial products, and things that were thought to be very safe or at least combined uncorrelated risk profiles suddenly started all taking in unison at the same time.
I thought 2008's cause was perfectly clear: the banks all sold insurance policies on each other (in the form of credit default swaps) that they couldn't fulfill. When one bank went under due to bad bets in the market, this triggered policies that, if fulfilled, would bankrupt the next bank. That in turn bankrupted the next, and so on.
People focus on the conditions that bankrupted the first bank, but that was just the final snowflake that happened to trigger the avalanche.
And no, saying natural idiocy in the citizenry is to be embraced, does not simplify the issue: it was caused by natural idiocy which was enabled by lax enforcement. There are countries where your credit score matters not at all and your current ability to actually repay is analyzed.
You can fix the banks all you want but if people take stupid loans you ll never run out of ways to crash.
This is my point, the focus on bad debt is like obsessing over the last snowflake that fell before the avalanche. The bad debt didn't cause the avalanche, the underlying structure of credit default swap contracts between the banks did. They were all writing each other checks that they couldn't cash. If the underlying problem of unaccounted-for credit default swaps didn't exist, the bad debt would've just been another snowflake falling on the ground, essentially.
https://en.m.wikipedia.org/wiki/Glass%E2%80%93Steagall_legis...
In America, the SEC had been systematic defunded and weakened - over successive administrations.
The argument, in the years before 2008, was that more regulation only holds wealth creator back. Especially when the market self corrects itself.
To suggest otherwise was even nearly un-American.
The SEC policy had adapted to pursue slam dunk cases, ensuring that it’s resources were spent in achieving some form of guaranteed deterrence.
However things like CDOs and the rest were out of its reach.
This leads to the low oversight.
The self correcting aspect of the market was also more mythical than practical.
As a financial analyst we were encouraged to ensure that model predictions were within range of other firms.
Multiples out of range meant that you were likely wrong.
Faith in the market became a shortcut meaning “someone else has done the homework”.
With all the rating agencies beholden to the purchaser of the rating, you start setting up the dominos for 2008.
Either you can let (systemically important) people buy whatever junk they want, or you can mandate a minimum bar.
But if you mandate a minimum, who judges what does or doesn't meet it?
They often are.
A lot of times a large investor pays them to look at a possible investment, and this case is quite ok. But the official ratings they are listed with are set by a third party mandating the company "go pay Fitch to rank you". It's not plain bribery like companies paying reviewers, but it's quite shady.
Yes, it's not a case of fraud. It's a case of a process structured in a way that facilitates fraud. (Who pays for the invoice has the power to negotiate its value.) It is a very different thing, but it's still a problem to be solved.
If something is too complex to interpret: maybe that's not immediately a problem, but it likely shouldn't serve as collateral for a loan (or similar), especially not systemically.
So this conceptual oracle doesn't need to be perfect: it just needs to accept a few false negatives (unnecessarily rejected collateral) in order to ensure there are few false positives (unwisely accepted collateral). Philosophically it certainly feels to me like an easier problem than finding a more generally trustworthy oracle; but these kind of things certainly are tricky.
To expand on this point. Deregulation with a federal reserve fallback is especially dangerous because it's essentially fake deregulation. When you know that you're too big to fail and the government is going to bail you then your risk to allocate capital effectively becomes zero.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3571441
Thus, it’s ok to spend extra cash to stock buybacks and maintain no cash reserves.
What do you believe caused regulators of financial instruments to be created?
Totally read experiments as experts
It would be very useful if we could kill vermin with it.
It's basically a thing guaranteed by single entity that promises that if the price drops they will buy tether at personal loss.
It's as safe as any pre-crypto, single company e-currencies. All of which died.
The only thing they have going for them is that they managed to place thrmselves as currency of the crypto market.
Stable coins with centralized generation are not interesting.
How many of those try to do something interesting and how many are just single entity backed coins like Tether?
One Explainer video with the founder: https://www.youtube.com/watch?v=bXLTE-5BkhA
I think DeFi is really getting interesting.
So even if they are telling the truth, it is still on the edge.
If 0.26% of Tether is withdrawn, it would need to start liquidating assets. That will, most of the time, be fine. Commercial paper is exceedingly liquid.
But sometimes, the liquidation will prompt a price fall. This is a fire sale. That, in turn, prompts more redemption, as holders of Tether grow concerned about its stability. This is a bank run. If Tether has a safety buffer between the value of its assets (U.S. dollar money market securities) and its liabilities (Tethers), this will--most of the time--be fine. If the situation spirals, however, a bank run can lead to collapse.
If it is not complete junk. Which there is good reason to believe Tether's is, and zero willingness from their side to show it isn't.
Their “reserves” and ratios and backing mean basically nothing since nobody’s ever going to be permitted to redeem a meaningful quantity anyways - while at the same time being too big to fail in the crypto industry. Exchanges know this.
They are chuck-e-cheese tokens used to facilitate capital flight from mainland China, and to provide 85% of all trading volume in the crypto space. $4.9B of BTC daily trade volume vs $0.17B for USD proper. [2]
[1] tether.to/legal
There's been a big market for escaping RMB capital controls since they were instituted, often via various gangs and casinos [2]
[1] https://twitter.com/patio11/status/1424897022268645379
[2] https://www.casino.org/news/us-marshals-service-to-seize-imp...
If Tether actually owned any commercial paper, they'd be the biggest player in the commercial paper space. Nobody's ever heard of them, and they don't own 30 billion dollars of it.
What they do own are paper promises from other companies that are controlled by them. Which are worthless. I own a paper promise from my dad to pay me a trillion dollars, that doesn't make me the richest man in the world. [1]
[1] Until I leverage it into minting a 'commercial-paper-backed', unredeemable, unaudited 'stable'coin.
Currently, all the holders of tether could ask for dollars, and they'd all get them, and there'd even be 0.26% of the original balance left. (Under quite some assumptions, namely that they could sell the commercial paper at the value at which they hold it in their accounts.)
However, if the value of their assets would shrink, say, by 1%, their equity would be wiped out, and they'd not have enough dollars to satisfy their liabilities. Then, if people would start demanding their dollars, the last 1%-0.26% = 0.74% of tether holders would get nothing, because there'd be nothing left.
That could trigger a good old bank run - you don't want to be among that last percent of bag holders, so better take out your dollars now while they still have some.
This is the correct reading: 0.26% is the excess in total capital compared to liabilities.
Earlier in the article, they state that Tether has 5% cash+equivs, so you know that 5% of Tether could be redeemed without trouble. If there were redemptions in excess of that, they would need to sell securities.
If Tether ceased operations tomorrow, just abandoned USDT and walked away with all the cash, what happens?
As long as these centralized exchanges collude to refuse redeeming USDT to USD, there is no run of the bank scenario.
It’s funny whenever people start to get outraged at seeing fractional reserve banking in any context besides where we’ve ignored it and accepted it.
[1] Citation for those who missed this development: https://www.eidebailly.com/insights/articles/2020/4/federal-...
But that's not why people bring up the figures. They're acting like it's inherently shady to have less than 100% (or 3, or whatever) cash reserves for something that ostensibly "has your money on demand", and such a scheme is inherently unsustainable, even though this is exactly what banks do.[1]
Be careful not to equate "one technical distinction that makes sense" with "the the things the hive mind is actually outraged about".
(Sorry, would have responded sooner but I got a "you're posting too fast, slow down" error.)
[1] Fortunately, this article is focusing on the point about just extending regulation, but every other time this comes up, the figure is supposed to provoke outrage about "how can they not have our cash ready to go?"
People aren't railing against fractional reserves, they're railing against something that was advertised as having full reserve turning fractional with a few sentences on a website.
This is not correct.
Just because banks are fractional reserve, doesn't mean that they don't have enough assets to cover their deposits.
It means that they don't have liquid assets to cover their deposits.
If a bank ever fails to have enough assets to cover its deposits, it immediately become insolvent, and is taken away from its owners.
Tether does not have enough liquid + illiquid[1] assets to cover their deposits. If they did, they wouldn't keep dodging audits. They aren't running a fractional reserve bank, they are simply running a fraud.
The reason we let banks get away with this is because they are routinely audited, and are insured against insolvency. Tether is neither.
[1] The nature of their fraud is that they are grossly overvaluing their illiquid assets. Because they have never undergone an audit, they can get away with this - they can claim that their illiquid assets are worth <whatever value they want>, with no third party oversight.
Indeed, the attestations (not audits!) that they have the money backing it even explicitly have the note on them that the assets are marked at cost of purchase, instead of mark-to-market.
[1] https://www.federalreserve.gov/monetarypolicy/reservereq.htm
EDIT: Walking back to first principals, why can't the USD fail? Because you can print whatever adults in the room decide need to be printed to hold the economy up. You cannot do this with a deflationary digital asset, nor one tied to smart contracts.
Why do neo-goldbugs always try and present this as some sort of gotcha? As an American taxpayer I'm happy to buy into the social contract that it implies.
Sounds like a feature to me. Printing money is effectively a socialized loss for everyone who's holding the currency.
> Sounds like a feature to me. Printing money is effectively a socialized loss for everyone who's holding the currency.
The economy functioning is of greater benefit to the whole than the value to currency hoarders (remember, it's a currency, it's meant for exchange not for value storage and it is optimized for that role) maintaining its value. If you want to preserve wealth, own property/assets you expect people to trade their time or capital for into the future. People don't buy stonks or bonds for the ticker in their account, they buy the appreciation of the underlying or its cashflow. Most people buy real estate to live in (utility), for the appreciation of the property, or for the rental income cash flow (caveat is folks like the Chinese buying up international property to store their wealth outside of the reach of the CCP).
Retirees on a fixed income; immigrants, the poor, and people with no access to credit would like to have a word with you
If you're expecting the value of a currency to never change, you are asking a fish to climb a tree.
Isnt that also... Insolvent?
>>>> prudently investing a lifetime of retirement savings
Would you deem people that invested on bonds of the US govt, GM, that they invested prudently?
>>>>If you're expecting the value of a currency to never change, you are asking a fish to climb a tree.
Change implies movement in both directions. Yet what we are seeing is a clear, pronounced, increasing onedirectional slope
That issue could occur in any system with expanding money supply, and you want a system in which the money supply expands in some sync with the economy, because otherwise it's attractive to just hoard paper (or crypto, or whatever) wealth and not invest.
In any case, isn't this primarily a political problem (or where the issue is private: a problem of a poorly phrased or one-sided contract)?
They may be fraud for all i know.
My issue was with the casual dismissal of inflation as some kind of necessity for a functioning economy.
My point is that is a priviled worldview of a typical elite that has never experienced poverty or real inflation in the flesh. Dismissing it as some kind of magic drug with annoying side effects shows lack of empathy for real consequences at the bottom 5th.
Are stablecoins better than central banks? Again, I dont know enough about stablecoins. But surely whatever answer that is out there does not include inflation or central banks as they exist today.
Additionally, note that the money supply is ever growing - faster than inflation because the economy is growing. Now, there are apparently extra factors to consider here, including concepts like the velocity of money, which mean that money supply isn't trivially linked 1-to-1 to the economy's expansion and inflation. I'm no expert on the matter, to be clear, but that's my impression trying to search even for refutations of that stance - if your impression of commonly held expert opinion is different, it'd be interesting to compare links to check whether our media bubbles differ somewhere.
We cannot rule out that stablecoins might serve us well. But just because we have imperfect information does not mean all possibilities are equally risking; the risks from conventional monetary policy (including variations such as modern monetary theory) are simply much better understood because we have examples and history to learn from. The original article makes the case that stablecoins aren't really all that novel as a financial instrument (even though their technical underpinnings might be), and the argument appears sound to me (a non expert) and the source reliable (with a reputation at risk were their analysis clearly wrong).
As such, why should we ignore risks we understand, and take on additional risks we don't understand? At issue here isn't really the fact that it's a cryptocoin, but rather how it functions in the financial market. The article explicitly calls out that the technical implementation may have benefits, and a knee-jerk ban could be overzealous.
The issue is essentially financial, not crypto related, and I don't see any clearly open questions that might argue for allowing unregulated stablecoins, let alone a refutation of the premise that stablecoins have risks.
Posing questions makes it sound like we should wait and see; but we should not wait to answer those questions given what we do know. Policy could _always_ be better informed in the future; that does not mean delay is _always_ the best choice.
Currency is an asset with a particular use-case. Its consumers do not enter into some elaborate agreement (compact) in order to use it. They use it because it's useful.
Currency predates the government:
https://www.sciencedaily.com/releases/2021/05/210506174103.h...
It arose as an emergent property of market interaction, i.e. distributed processes, not centralized authorities.
EDIT, responding to below:
No, the distributed processes of the market are a collective intelligence that vastly outperforms any single entity at the task of effectively managing the money supply.
See Selgin's articles on free banking:
https://www.alt-m.org/2015/07/29/there-was-no-place-like-can...
The centralized authorities protect the economy against some failure-modes that a distributed process is vulnerable to (currency scarcities, tampering, panics, large-scale theft). They introduce other problems. Whether one thinks they introduce more problems than they fix is pretty much the defining factor on where one stands regarding the utility of fiat currencies.
Having a bunch of private actors potentially run a huge experiment in which the economic fallout will not be born by them if it goes sideways is entirely unreasonable. I mean, that's kind of the whole problem with banks and their dodgy behavior, and this is no better; if anything it's even more risky since it's even less well understood and there's even less oversight, and fewer ways even a democratically elected government could intervene should the need and popular mandate arise.
I'm all for running that experiment, but then with proper oversight, accountability, transparency, disaster planning, etc - and as much as possible without the conflict of interest caused by having those running the system own large stakes of it too; that's just asking for shady business.
The experiment is entirely opt in, with no one being affected that does not choose to be.
The risk posed by any financial asset is not distributed uniformly across the economy. Its impact on any party is proportional to their direct and indirect exposure to that asset, which is something that they control and have to take responsibility for.
I suggest reading David Graeber's book Debt, the first 5000 years. He is the world authority on the topic.
A short summary:
Contrary to the imagined assumptions of Adam Smith, prehistoric humans operated via gift economies. This makes sense because they lived/survived in smallish tribal bands that required cooperation. This was even true of humans before our species split from our hominid ancestors. This is one reason why instincts around fairness and reciprocal empathetic behavior are so strong within us. For hunter gatherer bands they were essential to survival.
The first thing that can be called money appeared in temple complexes in the Levant, during the neolithic revolution, thousands of years before your article's discussion of trade behaviors in Europe. These were entirely about a social contract and central authority. Those that lived in the surrounding vicinity of the temple were required to bring contributions, eg a goat herder would bring goats. The temple would record their contribution, typically denominated in units of weighed grain. This recorded the temple's debt to the herder, who could later claim the grain as needed. In turn, the herder's contribution would be used to support the specialized people building and operating the temple, growing the grain, etc. In essence this was the first government and tax redistribution system.
It's a fascinating book if a bit slow due to the level of detail in places. It will disabuse you of many assumptions people have about the history of economics that are directly contradicted by archeological evidence or later, written history.
As to your second point, we have ample historical evidence of how that goes wrong.
"The study challenges this notion by introducing the concept that money was a bottom-up convention rather than a top-down regulation. Bronze Age money in Western Eurasia emerges in a socio-political context in which public institutions either did not exist (as was the case in Europe) or were uninterested in enforcing any kind of monetary policy (as in Mesopotamia). In fact, money was widespread and used on a daily basis at all levels of the population."
So it clearly argues that money originated as a bottom-up phenomena without centralized authorities. You may dispute that theory, but it's not a misreading of the link's argument.
>>Those that lived in the surrounding vicinity of the temple were required to bring contributions, eg a goat herder would bring goats. The temple would record their contribution, typically denominated in units of weighed grain.
To call that money is quite tenuous. This kind of system would have been useless with any kind of long-term trade, e.g. the trade in lazuli, tin or flint, which has been occurring since even before agriculture.
If we want to use a definition of money so expansive as to include some temple credit system, then we could look to the theories of Nick Szabo, who originated the concept of smart contracts and the blockchain.
Szabo notes that proto-money has originated independently in numerous regions, like the kula trading ring in pre-colonial Melanesia, where two independent forms of proto-money enabled long-term trade: necklaces circulated clockwise, from one island to another in the kula ring of islands, while armshells circulated counter-clockwise.
In pre-colonial America, wampun, which are shells of the clam venus mercanaria, were used as proto-money, and in fact adopted by the colonists to great enough extent that the term "shelling out", denoting spending money, originates from it.
Szabo hypothesizes that the standardized collectibles seen in various early sites of homo sapien settlement dating from the paleolithic, like the ostrich-eggshell beads from the Kenya Rift Valley dated at 40,000 B.P and the mammoth ivory bead necklace from Sungir, Russai dated to 28,000 B.P, were in fact the earliest forms of money, and that the trade-based trustless coordination that this proto-money enabled raised the carrying capacity of the environment, and enabled humans to out-compete neanderthals.
https://fermatslibrary.com/s/shelling-out-the-origins-of-mon...
There are some decentralized stablecoins (stablecoins backed by crypto assets + market rules that ensure they keep the peg) that have explicit insurance pools + rewards for being part of that insurance pool. For example, Liquity [0] allows users to deposit the stablecoin and earn rewards + favorable liquidation positions (a 10% discount) in return for being the first layer that purchases liquidations.
Not exactly sure what the equivalent would be in the traditional finance world, but I could imagine some sort of higher interest savings account that isn't FDIC insured, and takes losses first.
Most people clamoring for regs around stablecoins haven't gotten a chance to wrap their minds around this yet… nor have most of them considered the $ demom "cash and cash equivalents" that are on banks balance sheets not domiciled in the US, who have even smaller cash flows than some centralized stablecoin issuers folks love to pick on…
Add the saying goes, "bad money drives out good." In this case it probably means that crypto coins will mostly be held as an asset while national currencies are used for most transactions. Looking around, that certainly appears to be what is happening.
The practical implication of solving large scale bank failures with mass currency printing is hyperinflation. You would only get your money back in nominal terms, but its purchasing power would be greatly reduced. See also: Weimar Germany and Zimbabwe.
Frankly, if banks start failing to the extent that FDIC is not only necessary on a large scale but even possibly unsustainable, I kind of doubt that a bit of inflation is going to be the worst of our worries.
Other national governments didn't stuff Z$ into their armored-up national mattresses to bolster against the collapse of their local currency, and there wasn't an IMF holding debts denoted in Reichsmarks to create a demand for them internationally.
At the very least you'd need to quantify exactly how much money over what period of time might be a shock, and what kind other factors play a role. And then, yes, sure - let's not do things quantifiably similar to Zimbabwe or Weimar Germany. But I suspect there's a huge amount of room for most central banks to maneuver between status quo and hyperinflation; merely "some" printing of money isn't going to be a problem.
Indeed there are regularly stories of smaller countries without the kind of reserve status the dollar enjoys that make problematic central bank policies - and even if that has consequences (e.g. Turkey now), that's still a far cry from Weimar Germany or Zimbabwe under Mugabe.
These stablecoins appear to be much more fragile.
Sorry, wasn’t sure if you meant that as a difference.
Tether has less than 1/10th the amount of cash it would be required to have were it a bank.
https://www.federalreserve.gov/newsevents/pressreleases/bcre...
All retail banks in the United States are backstopped by the FDIC and the FDIC is backstopped by the federal reserve. Saying otherwise is tinfoil hat thinking. Fractional reserve banking isn’t a conspiracy.
Retail banks act on behalf of the federal reserve to actively manage the money supply, in part through fractional reserve lending.
The issue for stable coins and stable coin operators, is that they’re not backstopped by an FDIC, aren’t subject to any capital requirements and aren’t subject to any risk management practices.
It's not, because the Fed will--by law--freely convert reserve assets into cash at pre-determined ratios. Reserve requirements are an anachronism.
Capital = excess of assets over liabilities => capacity to satisfy creditors medium term (solvency)
That's at least 7% to 13% of the balance sheet for banks, and currently 0.26% for Tether.
Reserves = cash (and equivalents) in the vault => capacity to pay out immediately (liquidity)
Minimum reserves required used to be 3% to 10% of deposits, if I read this correctly, but are now 0% indeed, as you point out. Actual bank reserves, however, are much larger than what is required, even when the requirement was > 0 [see 1]. Tether holds about 5% in cash or Treasury bills.
So it seems that banks fare much better on both ratios than Tether.
That requirement has dropped to 0% because we've developed other ways of mandating that banks have enough cash. These are things like the tier 1 capital requirements, that require the bank to hold a certain amount of capital (which does not include money that depositors put in the bank! Those are assets, not capital) for its total asset composition.
Of course, the Fed allows this because demand deposit accounts at banks are insured by the FDIC, so people will get their money back even if the bank doesn't have it.
But if a crypto claims that it has a fixed currency value, then like banks (which they also say they have a fixed dollar reserve) it has to be regulated by the issuer of that currency.
I don't see any problem in regulating stable coin.
https://wp-vip.law.columbia.edu/wp-content/uploads/sites/2/2...
Many fintechs would be more willing to submit to banking regulation if they felt there was a sane and cost effective path to, you know, actually becoming a bank.
The article calls for regulators "to subject stablecoins to bank-like rules for transparency, liquidity and capital." Not to literally require Tether charter itself as a bank. Think money market funds or PayPal versus Wells Fargo.
Coinbase, for instance, is licensed as a money transmitter in 40+ states, and relies on those licenses to do business in most of the United States, including with regards to the issuance of USDC, per my understanding. Paypal also operates in the United States under this licensing scheme.
The rigor of money transmitter regulation and licensing requirements varies state by state, but regulators' rigor overall has been increasing steadily for decades. In addition to annual and quarterly paper filing requirements, a number of states—including California, New York, and Texas, among others—perform periodic (often annual) on-site examinations of licensed companies—paid-for by licensees—wherein visiting examiners expect to have complete access to records and data.
These examinations are rigorous. After an examination, it is very unlikely that a stablecoin issuer will be allowed to continue operating as a licensed entity without being financially sound, and without fully backing its financial obligations with safe investments.
Any inability by a licensee to comply with requests made during the course of an examination, and any inability to provide acceptable answers to questions asked, can result in fines, limitations placed on the operations of the licensee, or even the loss of the license. Depending on the jurisdiction, and depending on the specific activity, operating without a license may be a crime, and would likely put a licensee out of business.
Among the requirements imposed under these licensing schemes are bonding requirements, and "permissible investment" requirements. Typically, permitted investments include bank deposits and government debt, supplemented by surety bonds issued by large insurers. In many ways, these liquidity requirements are more rigorous than those imposed on banks. Most outstanding consumer liabilities—presumably including stablecoins issued by a licensee—must be backed by these permissible investments.
Of course, given that there are 50 separate state regulatory regimes with regards to money transmission, and given stablecoins' novelty, regulation specifically pertaining to stablecoins is not standardized yet. This is a matter of education and standards setting among regulators, however. It is not a matter of requiring new legislation at the national level, or even at the state level; nor does it necessarily require major involvement by the federal bank regulators. In most US states, banking regulators already have sufficient legal authority to craft stablecoin regulations if they want to—and they have the operational capacity to enforce such regulations as well—based on their authority to license and regulate money transmitters.
Yes? The article is calling on them to use that capacity to clarify how those rules apply to stablecoins. Nobody is calling for new legislation.
And while the article doesn't call for new legislation, some people are advocating for new federal legislation to give federal regulators the authority to regulate non-bank stablecoin issuers, which is an authority that they currently do not have, generally speaking. I certainly wouldn't say that "nobody" is calling for new legislation. For example:
https://www.coindesk.com/new-crypto-bill-in-us-congress-is-t...
OP commented that the OCC would need to change its rules in order to allow more entities to obtain bank charters, and the focus of the article seemed to be on national bank regulators (without explicitly drawing a distinction). Rather than focusing at the federal level, the focus should be placed on standardizing state regulation and educating state regulators as to the powers and obligations they already have.
The updated report is here (PDF): https://tether.to/wp-content/uploads/2021/08/tether_assuranc...
https://ag.ny.gov/press-release/2021/attorney-general-james-...
> Tether published a self-proclaimed ‘verification’ of its cash reserves, in 2017, that it characterized as “a good faith effort on our behalf to provide an interim analysis of our cash position.” In reality, however, the cash ostensibly backing tethers had only been placed in Tether’s account as of the very morning of the company’s ‘verification.’
> On November 1, 2018, Tether publicized another self-proclaimed ‘verification’ of its cash reserve; this time at Deltec Bank & Trust Ltd. of the Bahamas. The announcement linked to a letter dated November 1, 2018, which stated that tethers were fully backed by cash, at one dollar for every one tether. However, the very next day, on November 2, 2018, Tether began to transfer funds out of its account, ultimately moving hundreds of millions of dollars from Tether’s bank accounts to Bitfinex’s accounts. And so, as of November 2, 2018 — one day after their latest ‘verification’ — tethers were again no longer backed one-to-one by U.S. dollars in a Tether bank account.
I don't see much reason to have faith in the latest round.
> Where a rating is unavailable, publicly available industry standard conversion tables have been used to convert ratings from Moody’s or Fitch to the S&P equivalent.
Cryptocurrency is pulling back the iron curtain and revealing the real Wizard of Oz when you consider unequal regulatory treatment and unequal enforcement efforts. Remember BOA robosigning fake mortgages and commiting widespread fraud? Remember HSBC getting slaps on the wrist for multibillion dollar drug laundering? Let's see how far this political doublethink and perverse incentive onion goes.
Everyone hates them but the stickiness is real.
It's often a good choice for making informal payments between friends because you just need the paypal address - versus, for example, sort code, account number, and bank name. You might also need the bank address and to pay a fee for an international transfer.
Depending on the country you're in various other payment services may be available and/or common. For example I see services like Klarna's eating into this a bit, but they're certainly not ubiquitous.
I don't really follow how Paypal have managed to avoid becoming a bank in the US given that they offer what is, to my eye, clearly a suite of banking services!
It seems like you might be against regulating stablecoins as banks, but you also appear to be arguing for harsher punishments for banks that misbehave? Or something?
If the argument were that more regulation is needed, then surely up and coming actors with less to lose are even more important to catch with that regulation?
It's almost like these people must think that regulating banks is what causes the misbehavior, not the other way around.
Problem solved.
Paypal and Square aren't banks... but they are regulated under securities law and the things they do are not nearly as crazy as the things that the "real" banks do with money behind the scenes.
I think that's cool; the regulations are there for a reason. The regulations are there because they underpin the promises made by society. Like, you put stuff in your 401k and you get to retire one day. That's a big promise and the paperwork is justified.
Regulation is a sort of "guard labour" which society puts in place to ensure the system is legible, or comprehensible on some level. It doesn't work too well, but it's the best we've got.
I'd be OK with a world where there is "regulated" crypto and "unregulated" crypto, and on the unregulated sort you can lose all your money and that's fine and maybe nobody goes to jail. But the regulated money can't cross over into that place (e.g. GME can't make huge bets on it, you know your retirement funds won't end up there by stealth).
This is a straw man [1]. The article calls for regulators "to subject stablecoins to bank-like rules for transparency, liquidity and capital." The title of the article calls for them to be treated "like banks" (emphasis mine). Not as banks.
PayPal and Square are absolutely regulated like banks, as are money market funds, stablecoins' most obvious analog.
https://theodoregreenbaum.medium.com/the-crypto-time-bomb-is...
https://www.bloomberg.com/news/articles/2021-07-26/tether-ex...
If news suddenly come out about Tether being formally accused by the Department of Justice, the market may react in panic and things might get ugly. As an anecdote, I have a friend who told me she put a significant amount of her life savings into "etherium and carnado" (sic). There are millions of people like this who will get absolutely crushed.
I don't see a non-painful solution here. The regulators were too slow and have allowed a monster to be created.
Cash & Cash Equivalents & Other Short-Term Deposits & Commercial Paper:
Commercial Paper and Certificates of Deposit2 $30,807,654,349
Cash & Bank Deposits3 $6,282,756,692
Reverse Repo Notes4 $1,000,662,458
Treasury Bills5 $15,279,528,705
Subtotal $53,370,602,204
How do we go from an assumption of 5% in March to ~85% (53/62) in June? The author I can understand being cautious about the subject of stable coins, but this seems to be the wrong evidence to back their claim.
https://tether.to/wp-content/uploads/2021/08/tether_assuranc...
That $31 billion in commercial paper might not be actually liquid.
The only thing that counts are the $6 billion in cash and $15 billion in treasury bills.
There are a number of other issues as well. Which bank is holding that cash? Is it actually a real bank?
Those figures are all in billions. 21B/62B is still much much higher than the claimed 5%
Wasn't there a story about an independent audit that was cancelled or something? I remember the weird assertion that they couldn't disclose whose commercial paper they were holding, which I've never heard before
It could be an IOU from Binance.
The ratings were in their August report.
Tether has outright lied numerous times in the past, and have been caught doing so. Why would you believe their attestation when they won't allow audits?
That is, stablecoins are basically USD accounts, just with the actual bank receipts (the coins) circulating. Make that a form of deposit account, and regulate and insure it like any other deposit account.
It presents some questions that aren't answered in advance, but I don't think it's impossible to do this right. In some sense, a stablecoin system is easier to understand.
GBPCoin would be no different from using GBP on a bank account.
Eventually, somewhere, you have to spend money or take delivery of goods or services rendered. I don't think you can buttress that.
It’s by far the biggest. Both by both volume and liquidity.
This statement from the Economist is basically a lie. It's like saying people trade Forex leveraged so your cash in hand is leveraged. Tether is leveraged by 3rd parties. Tether is redeemable 1to1
Then, finally, we could be rid of these ridiculous things and on to the next ridiculous thing.
In the wake of the 2008 financial crisis, a well-capitalized player, Walmart, which was expanding its banking activity via its Sam's Club lending, was well positioned to replace the incumbent Wall Street firms as a major lender, but that was forestalled by Congress withholding a bank charter for political reasons:
https://www.nytimes.com/2007/03/17/business/17bank.html
Gatekeeping a market activity is extremely dangerous because it allows for massive rent seeking through corruption of the gatekeeper. It's inherently concentrates power in the hands of an elite.
e.g. this is a bit dated, but gets the point across about the revolving door between regulatory agencies and major market players:
https://philebersole.files.wordpress.com/2013/10/venn-diagra...
Even a non-corrupt gatekeeper can do enormous damage by poorly regimenting the industry. Something that has a systemic impact on a market is a systemic risk to the market. And government intervention is the only phenomena that no market player can opt out of, so it is the only one with a truly systemic impact on the market. Reducing government intervention reduces systemic risk.
Right now there is a free market in stablecoins. If you trust the attestations of USDT [1], you can use USDT. If you trust those of USDC [2] more, you can use that instead.
People should decide for themselves. And the systemic risk argument for limiting people's choices is absurd. The risk posed by any financial asset is not distributed uniformly across the economy. Its impact on any party is proportional to their direct and indirect exposure to that asset, which is something that they control and have to take responsibility for. In the absence of the government bodies that socialize the losses of irresponsible actors, those actors who take on imprudent risks would see the share of the financial market that they control steadily shrink at the expense of those who do not.
The suspension of this market feedback mechanism is what increases the risk of financial crisis.
[1] https://tether.to/wp-content/uploads/2021/08/tether_assuranc...
Stablecoins are money market funds. Those initially came about due to regulatory limits on deposit-account interest rates and risk thresholds. They nearly took out the real economy in 2008. Stablecoins are recreating that structure, guaranteeing a peg against a portfolio of risky assets inextricably tied to the mainline financial system. (This is a summary of the article.)
Edit: not sure why a basic point is downvoted, I updated to clarify.
Sorry, I was speaking metaphorically. Stablecoins are collateralized by money market assets. This backs their "guarantee" of convertibility. Money market funds used to provide a similar liquidity-risk transformation guarantee--they would never "break the buck," i.e. trade for less than $1/unit. Until they did in 2008, which created a credit crisis in the money markets as those funds all fire sold commercial paper at the same time to maintain their peg.
So we changed the rules. No fake pegs. If you find yourself in a credit crisis, you trade your fund at 98¢ instead of incurring 50¢ of liquidation costs to defend a magic number. In exchange, no marketing your funds as being as stable as deposit accounts.
See the rhyme?
Bottom line, you're painting with too broad a brush to say all stablecoins work like a MMF. At most, you're describing particular ones like Tether and Dai.
No they didn't. The government nearly took out the real economy.
In the decade before the financial crisis, regulatory pressure was used to force banks to issue more subprime mortgages. This article from 2000 warns of the consequences:
https://www.city-journal.org/html/trillion-dollar-bank-shake...
Government sponsored enteprises, which underwrite 50% of the entire US mortgage market, started massively increasing their subprime loan guarantees at the same time.
And then you have Federal Reserve mouthpiece, New York Times columnist Paul Krugman, advocating in this 2002 article that the Federal Reserve create a housing bubble:
https://www.nytimes.com/2002/08/02/opinion/dubya-s-double-di...
"To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."
This revisionist account of the causes of the financial crisis is just these same powerful forces, who are receiving billions in kickbacks from all of this corruption, pinning the blame for the financial crisis on the mythical deregulation-bogeyman.
>>Had Tether been around in '08, it would have been accumulating hordes of that stuff to back itself up.
That's irrelevant, because every one, including regulators, would have considered that adequate collateral. There was a systemic misassessment, due to the systemic impact that government intervention had on the housing and sub-prime mortgage market.
That's fine and irrelevant. Had Tether been around in '08, it would have been accumulating hordes of that stuff to back itself up.
> Wall Street has its own version: Its Big Lie is that banks and investment houses are merely victims of the crash. You see, the entire boom and bust was caused by misguided government policies. It was not irresponsible lending or derivative or excess leverage or misguided compensation packages, but rather long-standing housing policies that were at fault.
> Indeed, the arguments these folks make fail to withstand even casual scrutiny. But that has not stopped people who should know better from repeating them.
https://www.washingtonpost.com/business/what-caused-the-fina...
Paypal actually has a bunch of state licenses. [0] Twenty-three of those are with a banking commissioner or department.
How is any of that better?
Noobs typically need protecting from themselves.
Whenever I hear this I start looking for my wallet.
Visa and Mastercard handle roughly 7000 transactions per second. Solana's chain (as an example) is among the highest performing and can handle north of 50k TPS.
Edit: Please challenge my position and make me think. Votes are pointless, but being proven wrong is a learning experience.
We looked into the option of accepting cryptocurrency as a payment method but came up against too many obstacles. Without being able to prove the provenance of client funds we would be at risk of breaching "proceeds of crime" / anti-money laundering regulations.
And while the value of cryptocurrencies bounces all over the place and makes it impossible to budget, even stablecoins present problems. While they are pegged to something, the question is to what. Those pegged to precious metals such as gold or silver were a no-no, and even those pegged to the dollar present a problem. (As an aside it obviates one of the cited advantages of bitcoin - as a hedge against monetary policy-driven inflation). The question our board came up with was, if the currency is pegged to the dollar, why not just accept dollars? At least with established currencies we can buy currency hedging. With stablecoins, we'd be looking at specialist forex hedging, or messing about with futures. The board looked at the cost-benefit for about five minutes before they threw it out.
Lower transaction fees, no chargebacks, and being able to serve international customers effortlessly.
Agreed that accepting cryptocurrency doesn't have much appeal yet, and pitching it to a board would have mixed outcomes. I don't have any answers on provenance, and am not sure how this is being handled by the large amount of companies that currently accept it.
While adoption is low, I think most companies are opting to settle transactions to cash. This is probably the safest choice for now.
Now that I've argued for it, I also think accepting cryptocurrency doesn't fit everyone's business model yet and isn't always the best choice for some companies.