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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Good morning. President Donald Trump announced on Sunday that the 50 per cent tariffs on EU imports, which he threatened would start on June 1, would be delayed until July 9. If only we had a handy acronym for this sort of thing! Email me with suggestions: [email protected].
Stablecoins: it doesn’t take a Genius
A stablecoin issuer is a bank and a stablecoin is a bank deposit. This is not complicated. If you hand me money and I invest it, and in return I give you something that is a liability for me and an asset for you, and that is redeemable by you on demand and at par, I am a bank and the thing I have handed you is a deposit. It doesn’t matter if that thing also works as an intermediary in a crypto market, a token in a cross-border payment app or gets you a gumball out of a gumball machine. I’m a bank, you’re a depositor, and we’re in this together.
Keep these facts in mind and several developments of the past week or two become clearer. One was reported by The Wall Street Journal:
The nation’s biggest banks are exploring whether to team up to issue a joint stablecoin, a step intended to fend off escalating competition from the cryptocurrency industry . . . Banks have been bracing for the possibility that stablecoins could become widely adopted under President Trump and siphon away the deposits and transactions they handle . . . Banks see an opportunity for stablecoins to speed up more routine transactions, such as cross-border payments that can take days in the traditional payments system
No surprises here. A new wave of start-up banks has developed a pitch that consumers like. Normally in such a situation, legacy banks would be screaming for the start-ups to be crushed by the mountains of regulation they themselves labour under (or, if you prefer, are protected by). But the start-ups look to be in favour politically. So if you can’t beat ’em, join ’em.
The second bit of news is that the Genius (Guiding and Establishing National Innovation for US Stablecoins) act has made it through an important procedural vote in the Senate. Knowing that stablecoins are bank deposits, it is easy to see the act for what it is: a framework for light-touch regulation of a new kind of bank. Not a “narrow bank”, exactly (you can look up what that is) but a sort of “banking lite”.
The central feature of the act as currently written is the requirement the deposits/stablecoins be backed 1:1 by one of the following reserve assets: US dollars, US central bank reserves, “demand deposits . . . at an insured depository institution”, “Treasury bills, notes, or bonds with a remaining maturity of 93 days or less”, Treasury bill repo or reverse repo agreements, or shares in money market funds that invest only in the other permitted assets.
There is also the requirement of monthly disclosure of reserves and annual audits for issuers of more than $50bn in coins. The act also holds that stablecoin regulators should issue regulations covering capital requirements, reserve asset diversification and risk management (for non-banks, the regulator will be the Comptroller of the Currency, at least at the federal level). But it doesn’t say what those regulations should be.
It is striking that the act specifies that a stablecoin “is not a deposit . . . including a deposit recorded using distributed ledger technology”, but it’s important not to get caught up in terminology. If it quacks like a duck, and so on. It is also striking that the act insists that a stablecoin “does not offer a payment of yield or interest”. There are two ways to look at this latter point. You might say it’s a handout to the crypto industry; who wouldn’t want to run the sort of bank that is legally forbidden to pay depositors interest? On the other hand, you might see it as a safeguard; if issuers are not allowed to invest in longer-term, higher-yielding assets, it is better for the solvency of the industry that they don’t compete on yield.
With this sketch in mind, there are two big questions: Are these new sorts of banks, called stablecoin issuers, risky? And do they solve a problem that needs solving?
Steven Kelly of the Yale Program on Financial Stability reminded me that one source of risk was issuers’ deposits in what the act calls “insured depository institutions”. The problem is the FDIC insurance doesn’t apply to institutions at all; it applies only to deposits, up to $250,000. We saw how this can go wrong in 2023, when it turned out that Circle, issuer of the USDC stablecoin, had $3.3bn of its reserves deposited at Silicon Valley Bank when it failed. USDC holders ended up being bailed out by the US government, along with SVB’s other depositors. If a bank is runnable, and stablecoins reserves can be bank deposits, stablecoins are runnable — and the stablecoin could be the cause of the run, if enough coin holders want to redeem their deposits for cash.
The act could be amended to limit coin reserves to Treasury bills alone. But, Kelly points out, this would:
make [stablecoins] look like government money market funds — but that could get messy 1) if they’re truly to be used for payments, which will require some bank reserves to settle withdrawals from the cryptosphere, 2) if the Treasury doesn’t alter its issuance strategy to help meet that demand for bills, 3) if bills sell off or are illiquid, such as around debt ceiling dates.
So much for the risks. What about the benefits? It is true that the current payment system is too slow, not just for cross-border payments but (as Aaron Klein of Brookings has highlighted) for domestic ones, too. The question is whether privately issued stablecoins are the right technology to solve this problem.
This brings us back to where we started, with the banks. Suppose they (along with the Fed) tokenised deposits using a publicly agreed blockchain technology. This could capture the benefits of stablecoins for both speed and transparency, without the problem of having to move in and out of an intermediary currency. Stablecoins could then return to their original purpose: serving as chips in the cryptocurrency casino, a very minor form of banking we already know how to live with.
One good read
The careless days of youth.