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Should We Fear Stablecoins by Lawrence H. White
Should We Fear Stablecoins by Lawrence H. White
10 :5 1 A M
The United States already has “the widespread use of private monies for
consumer payments,” of course, namely transferable bank account balances.
(Brainard’s language wrongly suggests that only stablecoins and
cryptocurrencies are private monies.) Bank account monies are digital in the
sense of being represented by digits on the banks’ balance sheets, and also
in the sense of being transferable electronically. There is no fragmentation of
the dollar unit-of-account network from the issue of dollar-denominated
checking accounts by thousands of banks.
The view that that private banking systems are inherently or were historically
prone to volatility and runs—or that antebellum US banking in particular was
dominated by “inefficiency, fraud, and instability”—is sadly uninformed by the
scholarship of the last 50 years. I will leave a clarification of the historical
record of the antebellum United States to a planned future post on this blog
by George Selgin. But I will note that Scotland, Northern Ireland, and Hong
Kong today have “a predominance of private monies” in circulation without
any ill effects for consumers or financial stability.
Curiously, USDC does not advertise the size of its capital or its ratio of
capital to assets. Tether provided an attested accounting of the dollar values
of its total assets and total liabilities at the end of February 2021. Assets
exceeded liabilities, but not by much. Its implied capital ratio (assets minus
liabilities, divided by assets) was a wafer-thin 0.35%. Another way of putting
this is that Tether is leveraged 289 to 1. Recall that Fannie Mae and Freddie
Mac became insolvent with capital ratios about five times larger (1.51% and
1.74% respectively), or leverage ratios of 60 to 1. Meanwhile, Tether does
not hold a risk-free asset portfolio (which would mean holding only plain cash
or fully insured deposits).
USDC’s attested accounting similarly states that “US Dollars held in custody
accounts are at least equal or greater than the USDC tokens outstanding at
the Report Date and Time.” We do not know the value of the assets, and so
cannot infer the capital ratio. What about asset risk? A footnote explains that
“US Dollars held in custody accounts are the total balances in accounts held
by the Company at federally insured US depository institutions and in
approved investments on behalf of the USDC holders at the Report Date.”
Thus USDC also does not hold a risk-free asset portfolio. While some assets
are risk-free insured deposits, others are not, and we don’t know the mix.
For the typical 19th-century private banknote issuer, notes in circulation were
around half of liabilities (deposits were the other half, not all of them
redeemable on demand). For Tether and USDC, tokens in circulation are
99.9 percent of liabilities.
Are Tether and USDC tokens similar kinds of liabilities to banknotes? Both
Tether and USDC do speak of redeeming their tokens at $1 each. This
suggests a debt obligation similar to the obligation stated on the face of a
typical $1 banknote, “Will pay the bearer $1 on demand at our offices.” In
their user agreements, however, both Tether and USDC include escape
clauses. Tether’s reads as follows:
If asset losses make us unable to pay 100 cents per dollar token, in other
words, we may scale down the claim to fewer cents. Invoking this clause
would turn Tether into a mutual fund that has “broken the buck.” The clause
protects the issuer, but does not protect customers by making Tether tokens
less run-prone; quite the contrary.
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https://www.cato.org/blog/should-we-fear-stablecoins