Cryptocurrencies: A digital money rush is great. One race, not so much


In Hong Kong, money has been issued privately since 1846. The bill in my wallet is a promise from the local banking unit of HSBC Holdings Plc to pay the value written on it. By accepting it, I did not think about the creditworthiness of the lender. Whoever it is passed to will also take the note at face value and not instead ask for the Hong Kong dollars printed by Standard Chartered Plc.

Not requiring due diligence on cash seems logical, but it is in fact a very valuable property of money everywhere. Indeed, the AQL, or “No Questions Asked,” is so important that Yale School of Management finance professor Gary Gorton and Federal Reserve attorney Jeffery Zhang made it the centerpiece of their new. article, titled “Taming Wildcat Stablecoins”.

Blockchain-based stablecoins such as Tether and the Upcoming Diem are the latest form of private money: tokens that don’t offer Bitcoin-like speculative thrills but instead seek to be accepted as one-to-one clones. national currencies. They could become a powerful part of the modern digital economy, provided we know how to prevent their leak.



Confidence in physical species is provided by regulators. Since the value of Hong Kong’s currency is pegged to the US dollar, the city’s three banknote institutions buy debt certificates from the monetary authority by paying it $ 1 for every 7.8 local units. that they print. Hong Kong’s 7.5 million people no longer have to question the value of their money.

However, as digital stable coins proliferate around the world, NQA may not hold up. This is what happened in the days of free banking in the United States, when notes issued by a lender in Tennessee were sometimes reduced by 20% in Philadelphia. “There was constant haggling and arguing over the value of tickets in transactions,” Gorton and Zhang write. “Private banknotes were difficult to use in transactions. ”

Things have changed because of the civil war. President Abraham Lincoln was desperate to raise money for the war effort by selling bonds to newly licensed national lenders. The law passed by Congress in 1863 also ushered in a uniform currency. Subsequently, banks were taxed for paying for other types of banknotes, driving them out as well. Researchers argue that stablecoins are in a similar situation. In the current regulatory vacuum, they will have a hard time turning into money without asking questions. For NQA, they will need the blessing and oversight of the state. This was insufficient as the rapid growth of the new product took regulators by surprise.

But while blockchain technology is new, the economics of stablecoins is not. Buying $ 100 of these tokens is no different from a depositor who places $ 100 in a checking account, which preserves its value due to deposit insurance and regulatory control. Stablecoins will need a similar setup. Or, if issuers want to avoid the cost of being a commercial bank, regulators will need to insist on transparent, individual collateralization of liabilities with safe assets. Only then will the public be able to reliably trust tokens claiming to mimic official units of account – dollar, euro, pound, yen, yuan, etc.

Without these guarantees, allowing stable coins to compete with bank deposits could generate another combustible financial product. Money market funds, which avoided being regulated like bank deposits, had to be bailed out twice in a dozen years: during the 2008 crisis, then again last year when the Covid-19 hit . Gorton and Zhang warn that if policymakers wait a decade, stablecoin issuers will become the money market funds of the future. Doubts about a token’s ability to honor its 1: 1 fiat currency swap promise could prompt users to rush for redemption. Arsonist sales of assets by the coin issuer could plague other sectors of finance, forcing governments “to step in with a bailout whenever there is a financial panic,” the researchers said.

At just over $ 100 billion, the combined market value of the top five coins that follow the dollar – Tether, USD Coin, Binance USD, Dai, and Terra USD – is currently modest. But that’s because stablecoin users mostly come from cryptocurrency investors. With Visa Inc. starting to accept USD coins to settle card payments, it is only a matter of time before use becomes mainstream. The Diem Association, a consortium of Facebook Inc. and other companies and nonprofits, has partnered with a bank. This allows Diem’s ​​stable dollar to be launched from the US banking system, and Facebook’s huge reach could get it off the ground. Given the rapid pace at which the landscape is changing, Treasury Secretary Janet Yellen is correct in telling US regulators to hurry up and put in place a regulatory framework for stable coins.

If the rules strike the right balance between supporting innovation and maintaining stability, the United States may not need to follow China to offer an official digital currency, a possibility that a top Fed official mentioned recently.

Will the Fed choose regulated private stablecoins, a digital currency issued by the central bank, or both? Even though the rest of the world is waiting for answers, some decisions need to be made immediately. Tether, the most widely used dollar coin, is owned by Hong Kong-based iFinex Inc. Each country could potentially have a crypto or fintech company that mirrors its official unit of account. Trying to regulate entities once they are already too big to fail would be futile.

Money in the 21st century may not need to be official. But it should always be asked without asking questions, like the Hong Kong dollars in my wallet. It is a power that only regulators can confer. They should use it well.