Crypto-assets and decentralized finance through a financial stability lens

I would caution against trying to forestall financial crises through imposed centralization. The mundane benefit of a permissionless/dynamic financial system - which is to facilitate investments that produce economic returns - accrue daily, usually in imperceptible increments, while financial crises occur once every few years, with large and sudden drops in market values.

The latter gets the attention, due to their suddenness, but the benefits of the former compound to enormous proportions, and go largely unseen, due to how gradual the process is.

https://news.ycombinator.com/newsguidelines.html

The GSE loan guarantee program is largely backstopped by the Federal Reserve. It underwrites $6 trillion worth of US mortgages, which is approximately 50% of the entire market.

In 1999, the GSEs set out to increase liquidity in so-called under-served residential mortgage markets, and thereby reduce the risk for private lenders to lend in that market, as this article describes:

https://www.nytimes.com/1999/09/30/business/fannie-mae-eases...

>>''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer.

>>'Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

In terms of the Fed's direct role, its actions in 2003 - 2005 largely followed the playbook prescribed by Fed mouthpiece, Paul Krugman in 2002:

https://www.nytimes.com/1999/09/30/business/fannie-mae-eases...

>>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.

The market's natural behavior, which is to bankrupt irresponsible lenders, borrowers and speculators, seems to work in preventing bubbles from growing enough to cause financial instability. The collapse of Terra/Luna imposes more financial discipline in the crypto markets than any set of regulations could.

Attempts to artificially reduce instability can often have the opposite effect, by socializing the harmful effects of irresponsible risk taking, and thus creating moral hazard. This is the case with the Fed's role as the publicly funded lender of last resort, and the FDIC's role as publicly funded deposit insurer.

With respect to the latter, here is a study drawing that conclusion:

https://www.nber.org/papers/w22223

2) Debatable because of volatility.

3) Yes but being your own bank also means losing everything is a forgotten/misplaced password/seed phrase, clicking the wrong link, etc away. I don't know how many password resets a big bank in the US does everyday but I'm sure it's a mindbogglingly large number. The vast majority of the population isn't ready for and won't tolerate this. The fees you describe for payments in the financial system have anti-fraud measure costs (reversals, etc) baked in. Yet another feature of the traditional financial system that has been developed (in reality) after decades of real-world experience. It's the equivalent of every single individual building their own hardened vault and hiring armed private security.

4) Fair enough but there are realities in potentially "skirting" the "law" like this. Banks have significant processes to make sure you're not (for example) "funding terrorism" or whatever which is a serious crime in the US and very easy to do with cryptocurrencies. I, for one, don't want to risk the Feds showing up at my door because my funds ended up with someone on my government's enemies list. Just because you can do it with Bitcoin doesn't magically mean the people with guns and prisons will just say "Oh Bitcoin - nevermind - that's ok".

5) Lightning (and for that L2s) are mostly bolt-on hacks that sacrifice one or more features/properties of cryptocurrencies as originally intended when it became clear they fundamentally don't work for anything beyond toy-level. Again, from a users perspective as long as the payment network allows you to swipe a card and walk out with your purchase ASAP transaction rates are invisible to the user. If traditional payment systems needed higher transaction rates they would magically appear.

6) This is a very dangerous supposition.