Stablecoin companies should be regulated like the banks they are

The author is an FT editor

In October 2020, the Kansas banking commission closed a state bank in Almena, a railway town directly below the Nebraska border. The Federal Deposit Insurance Corporation, which guarantees the deposits of consumers at American banks, paid $ 18 million in order to complete every inserer. It was an inconspicuous procedure. The banking commission entered a Friday without interrupting the deposits over the weekend. This was the last time that a bank went bankrupt in America.

The collapse of the Almena State Bank and the rescue of her inserts remained unmentioned this week when Nellie Liang, the U.S. Ministry of Finance, testified in the Congress. Her appearance was followed by a report by the Ministry of Finance in November on StableCoins, digital assets that are bound to a sovereign currency. If you have a dollar stable-Tether or the USD Cinoder of the Binance USD-you keep something that should be as valuable as a dollar license.

The Ministry of Finance believes that stable coins could make the transfer from dollars from one place to another cheaper and more efficient, a development that is urgently needed in America and is long overdue.

But the Ministry of Finance also recommended that stable coins only output from insured deposit institutions - consumer banks, just like those in Almena. This is a more controversial proposal, and it is also a question for the very near future. Since January 2020, the overall offer of dollar tablecoins has increased from USD $ 174 billion. For comparison: One of the largest US consumer banks, Wells Fargo, reported consumer deposits of $ 864 billion in the past quarter. The StableCoin offer is now almost exactly one fifth of it-brand new, liquid financial liabilities that did not exist two years ago.

The Republicans on the committee argued that the impeciation of stable coins into FDIC-insured banks would discourage innovations. But the problem with innovations is that they are actually only the oldest trick in finance: take up short -term liabilities and then compensate for long -term assets that are either or do not exist.

Take the Almena State Bank. In 2014, according to a report by the FDIC, the bank, the bank began to record state-supported small business and agricultural loans with an aggressive strategy. The bank decided to sell the guaranteed parts of the loans and to keep the rest of the risk in the bank's books. A lot of loans to quickly give is a great way to create needy loans, the examiners of Kansas told Almena State Bank repeatedly. This is not an innovation. That only keeps lousy assets.

A stablecoin provider is a bank. It's not like a bank; It's a bank. If you buy a stable coin, offer the provider a dollar loan, just like if you deposit a dollar from a bank. And just like the bank, the StableCoin provider must have sufficient powerful assets in order to redeem this dollar loan against an actual US dollar if necessary. Stablecoins, just like bank deposits, are "running" - if people are worried about the quality of a currency COIN assets of the provider, they will get all their dollars back quickly and at the same time.

Morgan Ricks, professor at Vanderbilt Law School and former official of the Ministry of Finance, calls this the "money problem" - if they create a financial bindingness that is fluid and money, then it can be run by nature. If you want to create money, you can choose not to describe yourself as a bank, but you will still have the money problem. Stable coins are therefore not inherently doubtful. But banking is naturally delicate, which is why the countries have sophisticated regulatory systems to protect the deposits.

You can read any regulation as the story of a disaster. In the stormy 1920s, several hundred banks went bankrupt in America every year. Consumers would have to think carefully about where they deposit their money, because if they make the wrong choice, their deposits would disappear . 1933, at the height of the banking crisis of the early depression, 4,000 banks went bankrupt. In 1935 the US Congress founded the FDIC to protect deposits.

You can say that people are adults and should find out more before buying a dollar stall, but financial crises do not run in real life. When many people watch how supposed money simply disappears, unrest occurs. And so the countries have learned to regulate and plan consumer banks aggressively if they fail anyway. There are many problems in American finance, but consumer deposits are not included.

The Ministry of Finance has proposed to treat StableCoin providers such as deposit banks because they are depot banks, and America has already worked out a system for secure storage. The regulatory goal for stable coins should be the same as for banks as the Almena State Bank in Kansas: to keep them from failure, and if they have to fail to ensure that they fail tacitly.