If stablecoins remain unregulated, they could replay the 19th-century United States’ era of the era of \”wildcat banking\”. This conclusion appears in a paper by Yale economist Gary Gorton and Jeffrey Zhang, a lawyer for the Fed.
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In the study \”Taming the ‘Wild’ Stablecoins,\” the researchers drew a parallel with the period from 1837 to 1865 when there was no federal banking supervision in the United States.
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The country effectively had no national currency, and its issuance was carried out by many commercial banks with insufficient capitalization. This often led to the closure of lending institutions, and the banknotes they issued lost any value.
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Experts noted that \”digital forms of privately issued money\” pegged 1:1 to \”safe\” assets create a systemic risk to the financial system.
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Gorton and Zhang are convinced that stablecoins are not an efficient medium of exchange, as they are not always accepted at par and are exposed to the risk of bank panics. In the 19th century, dollars issued by banks were not insured and showed sharp fluctuations in value, which made transactions difficult.
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\”If policymakers linger for a decade, stablecoin issuers will become 21st-century money-market funds — \”too big to fail\”. The government will have to intervene with a package of rescue measures every time a financial panic occurs, — the paper says.
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Economists urged not to repeat past mistakes and to draw lessons. They noted that preserving monetary sovereignty is crucial to the implementation of monetary policy.
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Gorton and Zhang proposed regulating stablecoin issuers as banks and issuing a national digital currency.
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George Selgin, director of the Center for Money, Banking and Financial Alternatives at the Cato Institute, disagreed with the economists’ conclusions.
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The expert noted that state demands for monetary sovereignty exceeded consumer demands. In the end, it amounted to a financial monopoly by banks and those who run them.
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\”Even the decision to introduce a single US currency during the Civil War had nothing to do with consumer preferences. If that were really the case, there would be no need for a punitive 10% tax to force state banks to stop issuing their own banknotes,\” the expert explained.
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Avanti’s founder and CEO Caitlin Long saw references in Gorton and Zhang’s study to the upcoming meeting of the Working Group, which will discuss regulating stablecoins.
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HERE’S A NEW PAPER out of the Fed (+Yale) that lays out regulatory options for US dollar #stablecoins. Interesting—it was released yesterday (on a Saturday) & its first footnote references tomorrow’s big President’s Working Group meeting on the topic.🧐https://t.co/gfGWDbjjA4 pic.twitter.com/5VwMlnErHJ
— Caitlin Long 🔑 (@CaitlinLong_) July 18, 2021
In July, Federal Reserve Chair Jerome Powell expressed skepticism about the need for stablecoins. He compared stablecoins to money market funds and savings banks.
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In June, Boston Fed President Eric Rosengren stated, that stablecoins threaten the financial system. Vice Chair Randall Quarles urged not to fear stablecoins.
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Taming Wildcat Stablecoins by ForkLog on Scribd
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