The explosion in stablecoins revives a debate around “free banking”
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Re: The explosion in stablecoins revives a debate around “free banking”
#2Financial 'innovations' are increasingly rhetorical. Investors are seemingly being asked to bet on whether the humans can tell a rose by another name.
Re: The explosion in stablecoins revives a debate around “free banking”
#3> Together the dozens of stablecoins in existence, which include Dai, Tether and usd coin, have a market capitalisation of close to $150bn.
I'm assuming these stable coins aren't actually backed by $150bn in actual USD, which is the underlying problem here and harkens back to the issue with the era of unstable "wildcat" banking in the US before 1863:
> Before America instituted a national currency in 1863, banks issued their own banknotes, backed by assets and redeemable for gold or silver. Critics of stablecoins often point to this period of free banking, and the example of unstable “wildcat” banks in particular, as a cautionary tale.
Re: The explosion in stablecoins revives a debate around “free banking”
#4> Together the dozens of stablecoins in existence, which include Dai, Tether and usd coin, have a market capitalisation of close to $150bn. I'm assuming these stable coins aren't actually backed by $150bn in actual USD, which is the underlying problem here and harkens back to the issue with the era of unstable "wildcat" banking in the US before 1863: > Before America instituted a national currency in 1863, banks issu…
> I'm assuming these stable coins aren't actually backed by $150bn in actual USD,
Maybe I am missing something, how is this different than banks employing fractional reserve banking?
Re: The explosion in stablecoins revives a debate around “free banking”
#5> Together the dozens of stablecoins in existence, which include Dai, Tether and usd coin, have a market capitalisation of close to $150bn. I'm assuming these stable coins aren't actually backed by $150bn in actual USD, which is the underlying problem here and harkens back to the issue with the era of unstable "wildcat" banking in the US before 1863: > Before America instituted a national currency in 1863, banks issu…
> I'm assuming these stable coins aren't actually backed by $150bn in actual USD, Maybe I am missing something, how is this different than banks employing fractional reserve banking?
That's not a great analogy, you can't redeem currency at a bank.
My understanding is that stable coins are stable because they claim to be backed 1:1 by some other currency. If they are not actually doing that, then thats a fraudulent statement, isnt it?
Re: The explosion in stablecoins revives a debate around “free banking”
#6> Together the dozens of stablecoins in existence, which include Dai, Tether and usd coin, have a market capitalisation of close to $150bn. I'm assuming these stable coins aren't actually backed by $150bn in actual USD, which is the underlying problem here and harkens back to the issue with the era of unstable "wildcat" banking in the US before 1863: > Before America instituted a national currency in 1863, banks issu…
> I'm assuming these stable coins aren't actually backed by $150bn in actual USD, Maybe I am missing something, how is this different than banks employing fractional reserve banking?
Several differences:
1) Fractional reserve banking has caused numerous financial crisies.
2) In the US, banks are required by law to carry deposit insurance (FDIC). While it is theoretically possible for the FDIC to become insolvent, that is far less likely than a bank becoming insolvent. Further, in practice, the FDIC can't fail because the government will just fund it directly if it's actual funds ran out.
3) While banks have less cash on hand than the sum of their debts; they are still solvent. That is to say, they are capable of paying back all of their creditors, they just need to be able to collect from their debtors in order to afford it.
When a bank takes a deposit for $100, they have a $100 liability, and a $100 asset in cash. Net worth $0, technically solvent.
They then loan out $90. Considering the likelihood of repayment, interest rate, and loan term, this debt is an asset that is worth (hopefully) >$90, so the bank remains solvent. The bank can take some of that surplass worth they have to do things like pay salaries, build offices, fund FDIC, give executive's their bonues, etc.
In contrast, when a stablecoin takes a deposit of $100, they have a $100 liability and $100 asset in cash. If they take $90 to pay salaries, they now have only $10 dollars in assets and are insolvent. In theory, a stablecoin could loan out that $90, or use it to invest is something else. If they do this, they are in roughly the same situation as the bank where they are hoping that their asset ends up being worth as much as they expect. They are also less regulated then banks, so the odds of something going wrong (either mallisiously or not) is greater.
In practice, even the normal banking system runs into some issues:
* Deposits into banks are much more liquid then loans out of banks. In theory, everyone can decide to withdraw all their money tomorrow. But if you took at a mortgage, the bank may have to wait 30 years to be fully payed back. This can be mitigate by selling debt to other institutions, or taking out loans backed by the debt, but you can still run into issue when these markets experience problems.
* Debtors do not always pay back what they owe to the banks. In theory this is accounted for, but if banks overestimate the actual value of the debts, they can end up in a situation where they are actually insolvent.
Re: The explosion in stablecoins revives a debate around “free banking”
#7> Together the dozens of stablecoins in existence, which include Dai, Tether and usd coin, have a market capitalisation of close to $150bn. I'm assuming these stable coins aren't actually backed by $150bn in actual USD, which is the underlying problem here and harkens back to the issue with the era of unstable "wildcat" banking in the US before 1863: > Before America instituted a national currency in 1863, banks issu…
As usual with crypto, it's up to the investor to perform due diligence.
BUSD as of Oct 29th had a market cap of $13.1B USD which was fully backed by fiat USD held in bank accounts which are audited monthly [1]
USDT has a market cap of $74B and has never been fully audited and last released an attestation report in March 2021.
Re: The explosion in stablecoins revives a debate around “free banking”
#8Earlier quoted context omitted.
> I'm assuming these stable coins aren't actually backed by $150bn in actual USD, Maybe I am missing something, how is this different than banks employing fractional reserve banking?
Several differences: 1) Fractional reserve banking has caused numerous financial crisies. 2) In the US, banks are required by law to carry deposit insurance (FDIC). While it is theoretically possible for the FDIC to become insolvent, that is far less likely than a bank becoming insolvent. Further, in practice, the FDIC can't fail because the government will just fund it directly if it's actual funds ran out. 3) While…
> if banks overestimate the actual value of the debts, they can end up in a situation where they are actually insolvent.
I think everyone here knows they'd never do that!
Re: The explosion in stablecoins revives a debate around “free banking”
#9Imagine being a billionaire because you convinced enough people to give you money in exchange for a promise.
Re: The explosion in stablecoins revives a debate around “free banking”
#10Imagine being a billionaire because you convinced enough people to give you money in exchange for a promise.
Pretty sure this is exactly how most startups get funded.