HomeCryptoStablecoins, Wildcat Banking and a Cause for Concern

Stablecoins, Wildcat Banking and a Cause for Concern

Surely, traditional finance is centralized and of course, stablecoins are not. Indeed, all the “experts” in podcasts keep saying how decentralization is awesome and will be the future. And certainly, the almighty financial expert Michael Saylor who lost billions in investments praises decentralization. Traditional finance is an insult to its investors, it is an expensive joke maliciously intended to print money. But, there’s a keyword in the last sentence, “intent”. Centralized or decentralized, a large ecosystem especially for finance will never be free of scams and transaction fees. More importantly, collective governance is overrated and will almost always lead to a rise in entropy.

Finance used to be decentralized at some point, specifically in the mid 1800’s known as the wildcat banking era. During that time, banks issued their own currencies that were obviously not backed by sufficient cash. Let’s call it hollow money, a currency with limited utility. In many ways, cryptocurrencies and stablecoins are very much similar to this. Decentralized yet questionable. Despite that, some coins and tokens do offer utility and advantages over traditional finance. So the question is, can digital assets be the decentralized solution to replace traditional finance? Well, the US bankers don’t think so!

Stablecoins Vs. Banks

Last year, SEC Chair Gary Gensler warned against digital assets and their resemblance to private money. Gensler called the crypto market as a “wild west casino” and the stablecoins its “poker chips”. Essentially, this comparison clarified the Fed’s stance on digital assets.

Recently, the acting Federal Deposit Insurance Corporation (FDIC) chairman Martin J. Gruenberg made a speech that further expresses their concern on stablecoins. Once again, Gruenberg compared digital assets to private money in the 1850’s.

“As pointed out in the [Financial Stability Oversight Council] digital asset report, ‘currency during the free banking era consisted of bank notes, that is, liabilities of individual banks payable in gold or silver if presented at the issuing bank. As many as 1,500 currencies circulated at any one time

This decentralized form of monetary exchange led to numerous bank runs and cycles of bank failures. While our financial system has advanced significantly over the past century, we would do well to keep our history in mind. It offers a valuable lesson about the risks of private money, both digital and physical, for the US financial system when we consider the more-than 21,000 crypto assets currently in existence.”

Shadow Banking

According to Gruenberg, stablecoins have to potential to be very mush disruptive to traditional banking. In short, they could cause credit discrimination that would lead to shadow banking.

“Economies of scale associated with payment stablecoins could lead to further consolidation in the banking system or disintermediation of traditional banks. And the network effects associated with payment stablecoins could alter the manner in which credit is extended within the banking system — for example by facilitating greater use of FinTech and non-bank lending — and possibly leading to forms of credit disintermediation that could harm the viability of many U.S. banks and potentially create a foundation for a new type of shadow banking.”

In order to prevent that, the FDIC acting chairman argues that stablecoins need regulations and requirements. For one, they should transact on ““permissioned ledger systems with robust governance and compliance mechanisms.” But more importantly, they should be backed by dollar-for-dollar with high quality US Treasury assets. That means no algorithmic stablecoins and no Do Kwon type Ponzi scheme.

Stablecoins, Wildcat Banking and a Cause for Concern” has been originally published on HiExchange Blog by Nima Asgari.

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