The Breakdown - Does a Law From the Civil War Make Stablecoins Illegal?

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.a.o and BitStamp and produced and distributed by CoinDes. What's going on, guys? It is Sunday, June 20th, and that means it's time for Long Reads Sunday. First of all, however, happy Father's Day to all the Bitcoin dads out there. I hope you are celebrating with your loved ones. close. Anyway, for a fun Father's Day long-read Sunday, I want to read a piece called How the Civil War Shapes the Future of Stable Coins. It's by Franklin Noll, who is a historian of money. And I think it's particularly relevant in a week where we had a huge debate on a national

Starting point is 00:00:53 public stage at the House hearing on a digital dollar. The question of stable coins and decentralized money versus centralized money is one of the key conversations of the next decade. So let's go back in history to see how we've wrestled with that in the past. How the Civil War shapes the future of stable coins. The Civil War replaced a decentralized monetary system with a centralized one, setting precedence for the regulation of stable coins today. In 1861, Civil War broke out in the United States. Over the next four years of conflict, the politics of the US were remade, and so were its

Starting point is 00:01:28 monetary affairs. A new monetary system was born during the war years that exists with us today and is shaping our stable coin future. The Decentralized Currency System Before the Civil War, there was a decentralized currency system with a myriad of coins at banknotes. All banknotes were privately issued through independent banks. There was no U.S. government pay for money. If a bank wanted to issue currency, it had to deposit bonds with its state banking authority. Usually a bank could issue anywhere from 90% to 100% of the value

Starting point is 00:01:56 of the bonds deposited. However, in some states, you could basically deposit worthless bonds as collateral, and some banks just ignored the rules. The result was thousands of different banknotes, all with different values. Making matters worse were wildcat banks. A wildcat bank was a fly-by-night operation that appeared in a region and spent its banknotes far and wide. Then it would just pull up stakes and disappear, leaving worthless banknotes behind. During the Civil War, Congress and the Abraham Lincoln administration overturned the decentralized system, establishing a government monopoly on money. It did this in a number of ways, but the most relevant to the future of stable coins were through the redefinition of money and the establishment of the national banking system.

Starting point is 00:02:35 Birth of the Money Monopoly Before the Civil War, money could be current or lawful. Current money was public or private money that was widely used. Lawful money was official money. Once the Civil War began, Congress began to equate current money with lawful money. For example, an 1862 law stated that no one could issue any instrument, quote, for a less sum than $1,000, intended to circulate as money, or used in lieu of lawful money. Meanwhile, in 1864, Congress declared that no one, quote, shall utter or pass any coins intended for the use and purpose of current money.

Starting point is 00:03:07 So, soon, current money was the same as lawful money. In other words, the only money that could circulate freely and be used in payments was official U.S. money. Combined with this redefinition of money was the restraint of private banknotes, as we have seen during the early 19th century, private banks issued thousands of banknotes. To end this chaotic situation and establish a U.S. currency union, the national banking system was, was created in 1863 under the direction of the Office of the Comptroller of the currency. These new national banks would be able to issue their own notes called National Banknotes. In effect, the OCC re-established the private currency system on a government-controlled collection of national banks that met strict deposit, 100% reserves against issuance, and auditing criteria, and issued government-approved banknotes. Congress completed the end of private banknotes by taxing them

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Starting point is 00:05:01 Visit bitstamp.net to learn more. BitStamp for all the ways we crypto. The Civil War and Stablecoins. How does the monetary legacy of the Civil War impact stable coins today? Let us look at some recent developments. Remember Wildcat banks and the fear of a bank issuing a worthless currency taking its profits and disappearing? The Stable Coin Classification and Regulation Act often referred to as the Stable Act was addressing this very fear, but for Stable Coins.

Starting point is 00:05:32 The bill, introduced into the U.S. House of Representatives in November 2020, called for any institution issuing a stable coin to be a member of the federal reserve system and to hold 100% reserves against any coin issuance. Such federal regulation it was hoped would prevent any wildcatting. Here, instead of wildcat banks, we have wildcat stable coin issuers. But the Stable Act rests on a contradiction. It basically defines stable coins as private current money and authorizes their issuance. As we have seen, current money is legally the same as lawful official U.S. money. These authorized stable coins thus challenge the U.S. monetary monopoly established during the Civil War, clearly violating the laws of 1862 unless there are no

Starting point is 00:06:09 fractional stable coins, in 1864 mentioned above. So are stable coins illegal? Stable coins run into legal trouble when they seek to be in direct competition with the U.S. dollar in retail payments. A stable coin that tries to replace the dollar as a means of payment in everyday transactions will be identified as current money and thus in violation of the 1864 law forbidding private coins, unless you argue that a stable coin is not actually a coin or token. The stable coins more closely resemble a monetary instrument known as Scrip. Scrip is non-dollar-denominated private money that only operates in an enclosed or geographically limited system, and that cannot be directly substituted for U.S. dollars. Hence, Scrip is not a challenge to the U.S. government's monopoly on money.

Starting point is 00:06:48 The only legal private money in the U.S. Tate A falls into this category. So long as stablecoins operate in closed private networks, there should not be a legal problem. This was the path the OCC took in its interpretive letter in January 2021. Here, the OCC defines stable coins as a payment mechanism and not current money. Quote, stable coins serve as a means of representing fiat currency on an independent node verification network. In this way, the stable coin provides a means for fiat currency to have access to the payment rails

Starting point is 00:07:15 of an independent node verification network. This is a fancy way of saying that stable coins are script. But let's look at another interpretive letter. On September 21st, 2020, the OCC issued a statement that allowed national banks to hold stable coin reserves for stable coin issuers. This rule allows national banks to facilitate stablecoin issuance when they hold the 100% backing reserves. One can now envision a nationwide

Starting point is 00:07:37 network of stablecoin issuers resting on the national banking system. Civil War era national banknotes could be replaced with stablecoins. The Civil War replaced a decentralized monetary system with a centralized one, and in the process establish new monetary definitions and structures that exist to this day. The Civil War legacy is shaping the development of stablecoins and cryptocurrency in general. So let's hold aside this piece itself. I think it's very cool to have that history, and I appreciate Franklin's writing. What I'm more interested in is that there is this very central issue that has much more to do with what stable coins envision themselves to be and how the U.S. wants to perpetuate its monopoly on money. This is not anymore a theoretical issue. Really,

Starting point is 00:08:20 I believe that since the introduction of Libra by Facebook, it hasn't been a theoretical issue. It's been a very real issue. Since the moment that was announced, governments around the world who had previously had no concerns about their monopoly on money, all of a sudden did. And what it brought up is questions about what the money of the future looks like. Certainly, it seems insane to think that it would simply be the same sort of bills and coins, physical remnants of a physical era that we've had for so long. Inevitably, it seemed, it would be a natively digital money, but then again, what does that mean? These are the types of questions that set off the last two years of exploration of governments around the world around central bank digital currencies, around digital

Starting point is 00:09:04 currencies in general. Meanwhile, as that has all been happening, stable coins have grown into a $100 billion asset. Use day in, day out by traders across jurisdictions for varieties of functions, for the convenience, ease, effortlessness they afford. Now, to talk to someone like Jeremy, me a lair from Circle, there is no inherent contradiction between a U.S. denominated stable coin and the U.S. dollar itself, especially a new digital dollar. In fact, I believe that many of these companies see themselves ultimately as trying to build the rails for an eventual digital dollar system. But they're also coming into the legacy of the shadow banking in euro dollar system, where trillions of dollar equivalents float around the market without any oversight or

Starting point is 00:09:49 control by the U.S. government. Indeed, it is this shadow banking and euro dollar system that has people like Jeff Snyder laughing at our memes like Money Printer Go Burr because they assume that the U.S. government can actually control the money supply when, in his estimation, and people who agree with him, it can't. The euro dollar system is simply to propagate, too huge, to actually have Fed policy have much of an impact on the dollar at all. Stablecoins are an interesting new X factor in that, but I think that what's clear is one, stable coins have found product market fit in the crypto industry. They are essential and integral to a huge number of functions, and they are preferred by basically

Starting point is 00:10:28 any trader who has used them versus any traditional alternative. It seems absolutely impossible to me that traditional finance traders won't similarly find the benefits of these natively digital systems. But two, the second thing that's clear is that the regulatory conversation around stable coins is just beginning. The Stable Act, Brian Brooks' last-minute changes at the OCC, these were opening salvos of a much bigger battle. I feel reasonably confident that the biggest questions, considerations, and challenges that the larger crypto industry has vis-a-vis the U.S. government in the years to come are likely to be

Starting point is 00:11:04 about stablecoins first, not about Bitcoin. Like everything, all of this comes back to how does the U.S. imagine the U.S.-led world order of the next 50 years, not the last 50 years? Some would argue that the lack of an answer to that question, more than any one answer that we don't like, has been a contributor to why there's been so much economic chaos over the last few decades. Either way, it is a fascinating time to live in. There is deep history, as you could tell from this LRS that goes into it, and I am excited and thrilled to continue to see these developments as they happen. You are living in a historical moment, and I hope you enjoy and appreciate that. Until tomorrow, guys, be safe and take care of each other. Peace.

The Breakdown - Does a Law From the Civil War Make Stablecoins Illegal?

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