The Breakdown - Using History As A Weapon: The Latest Political Attack on Stablecoins

Starting point is 00:00:00 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 Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, July 25th, and that means it's time for Long Reads Sunday. And today we have a bunch of my favorite things. First, we're reading a Nick Carter piece. Always good.

Starting point is 00:00:36 can't miss with that. Second, we get to talk about history. Third, we get to fight a little fud. All in all, excellent Long Read Sunday. Glad to have you here. The piece is called Why Central Bankers invoke free banking to attack stable coins. And it's a specific response to a paper from a sitting fed lawyer as well as a professor at Yale who recently wrote a pretty anti-stable coin paper. So, without any further ado, let's dive into why Central Bankers invoke free banking to attack stable coins. If you're going to warn people about stable coins by citing 19th century history, you should at least include the full record. If you pay attention to central bank gadget prop, you may have noticed an interesting trend. Central bankers are increasingly fond of making references

Starting point is 00:01:23 to monetary history. Specifically, the pre-Civil War period in the U.S. That was when the U.S. entered a monetary era known as free banking. As it's characterized today, this was a rollicking time, rife with bank failures and monetary instability, in which banknotes traded at a discount to par reflecting the creditworthiness of the bank. As the central bankers tell it, if you were to take a Tennessee banknote to New York, for instance, your money might not have been accepted at par. From the 1830s to the 1860s, the vast majority of banknotes were issued privately by banks mostly regulated by individual states. Our monetary elite has become fixated on this period recently. In May, Federal Reserve Governor Lail Brainer denounced Antebellum Banking.

Starting point is 00:02:04 in a speech exploring the creation of central bank digital currencies. Quote, Indeed, the period in the 19th century when there was active competition among issuers of private paper banknotes in the United States is now notorious for inefficiency, fraud, and instability in the payment system. It led to the need for a uniform form of money backed by the national government. Back in 2018, the president of the St. Louis Fed, James Bullard, also issued his own history-inspired critique of cryptocurrency, saying, quote, cryptocurrencies are creating drift toward a

Starting point is 00:02:34 non-uniform currency in the U.S., a state of affairs that has existed historically but was disliked and eventually replaced. In a hearing on digital currency last month, U.S. Senator Elizabeth Warren repeated similar talking points, comparing stable coins to Wildcat notes from the 19th century. And just last weekend, Jeffrey Zhang, an attorney at the Federal Reserve, and Gary Gorton, a professor at Yale, published a paper entitled Taming Wildcat Stable Coins, in which they pejoratively compare stable coins today to the banking contacts in the 19th century, which they refer to as free banking. The paper concludes that privately issued money,

Starting point is 00:03:09 whether free banking or stablecoin-based, cannot work, and that only a sovereign can supply good money. The paper was commended by none other than the high prince of fiat, Paul Krugman, who used it as an opportunity to condemn stablecoins. He tweeted, This by Gorton and Zang is very good. Stable coins are just a modern version of free banking, in which private banks issued their own notes supposedly banked by specie.

Starting point is 00:03:31 That system was crisis-ridden, and the same will be true, Now. In all of these cases, a tax on free banking, the notion of permitting banks to operate largely outside the confines of state regulation, are rhetorically employed to undermine stablecoins. Stable coins. Staplecoins come in many forms, but primarily exist as tokenized IOUs for commercial bank dollars that circulate on public blockchains, allowing settlement in dollars or other sovereign currency terms. They trade at par because they are convertible for underlying dollars in commercial banks, or sold to someone who is willing to undertake that conversion. Because stablecoins trade on public blockchains and facilitate the global exchange of value across a network of exchanges and wallets, and issuers, for the most part, aren't regulated as banks, these comparisons to lazai-faire banking naturally emerge.

Starting point is 00:04:18 So do stablecoins constitute a reprisal of free banking, and if so, is this a problem? On the first question, I would answer in the affirmative. Free banks relied on gold as reserves, whereas stable coins are mostly issued against commercial bank dollars. Larry White points out other things where there are no analogies in terms of the liabilities between notes issued by free banks and the stable coins of today. But by and large, the comparisons are quite apt. So much so that we wrote a white paper in summer 2020, pointing out that stable coins and their issuers, oftentimes exchanges, represent a potential technologically enabled return to a free banking era. As we say in the piece, lessons can be taken from the history of prior banking epics when private entities took responsibility for issuing money, a

Starting point is 00:05:01 effectively outside of state control. So on this point, we very much agree with the comparison between free banks and stable coins proffered by Brainer, Zhang, and Gorton. However, their emphasis solely on the U.S. instance of free banking is wrongheaded. As economist George Selgin and Larry White have spent virtually their entire careers pointing out, and we echo in our crypto dollar piece, the American antebellum episode did not constitute genuine laissez-faire banking. Banks during that period were forced to hold risky state government bonds and were restricted from engaging and branching, meaning they couldn't establish branches nationwide. This inhibited them from geographically diversifying their depositor base and from having free choice in their asset portfolio.

Starting point is 00:05:41 It's no wonder that bank failures were common. Neither of these particular U.S.-based restrictions was present in genuine free banking episodes such as Canada. There's also Scotland's successful case study chronicled by the aforementioned Selgin and White, alongside Krosner and Dowd. The repeated omission of successful historical instances of free banking, Scotland, Canada, Sweden, and Switzerland, in which bank failures were uncommon, notes were mutually accepted by rival banks and traded at par, appears strategic. For analyses that do consider the fuller historical record, see Selgin and White's comparisons of free banking and contemporary stablecoins.

Starting point is 00:06:20 The breakdown is sponsored by NIDIG, the institutional grade platform for Bitcoin. As longtime listeners know, NIDIG is a major force in the Bitcoin space. and they're now making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers to offer Bitcoin. That mainstream access is critical for all of us, and you can learn more about it at nydig.com slash nLW. That's nydig.com forward slash nLW. So why are the central bankers so keen to characterize the private issuance of money as inherently unstable?

Starting point is 00:06:58 Because they are deeply conflicted. They rely on these banks. myths to sell us their proposed solution in the form of CBDCs. It's no coincidence the anti-stable coin contingent is generally fond of CBDCs and believes the state should not only control the issuance of money, but also have the power to determine which transactions are valid. We do not have to speculate on this front. If you listen to central bankers, they invariably de-emphasize privacy and transactions and mention the necessary imposition of controls, inhibiting activities that the government claims are illicit. This is sometimes euphemized as balancing an individual.

Starting point is 00:07:31 right to privacy with the public's interest in enforcement of AML CFT regulations, despite the fact that physical cash has no inbuilt anti-money laundering and combating the financing of terrorism controls. I have yet to come across a central banker proposing a CBDC project with the precise and same qualities of privacy and transactional freedom as physical cash. The debate is fundamentally about the state's role in society. CBDCs promise to strip some of the issuing power of money away from the commercial bank sector, which exists as a public-private partnership and restore it to the central government. This would naturally grant government extremely powerful tools for surveillance,

Starting point is 00:08:08 societal control, and would empower central bankers with granular tools to affect the money supply. In a country where the politicization of banking is an established doctrine, CBDCs would represent a colossal victory for those trying to concentrate power in state hands. Thus, the reason historical episodes with private money issuance and administration are so frequently a target is because they stand in the way of attacks on stablecoins. The success of stable coins and the attended stagnation of CBDC projects is embarrassing to central bankers and policy makers. Stablecoins offer everything that CBDCs hope to achieve,

Starting point is 00:08:42 but in a completely bottom-up free market way. If economists can prove that episodes of free and unrestricted banking were failures and led to massive consumer losses, they might prove that similar latter-day systems are a bad idea too. Unfortunately for them, not only is their historical account, flawed, but so is their present-day assessment of stable coins. Far from being inherently flawed or unstable, stable coins are an overwhelming success today. The free market has allocated over $110 billion in deposits to these projects, even though they have only really existed in production

Starting point is 00:09:13 for seven years or so. Stablecoins collectively today settle anywhere between $10 and $20 billion on a given day, trading with extremely tight spreads. Gorton and Zhang object that stablecoin recipients will not accept these tokens at par because the no-question-asked principle is violated due to lack of confidence in the issue or no government backing. Quote, without NQA, they insist, the community has no money. Stable coins that do not satisfy this principle also will not be able to serve as money in transactions.

Starting point is 00:09:40 But their analysis is off-base both historically and in the present day. Private banknotes worked just fine in Scotland between 1716 and 1844. Today, stable coins have been embraced and indeed accepted at par by millions of individuals and firms thanks to the presence of convertibility. Indeed, our venture fund, alongside many of our industry colleagues, today prefers to settle

Starting point is 00:10:02 investments in stablecoin format because they operate 24-7, offer strong finality, and do not face the massive headaches involved with sending wires abroad. Startups we invest in increasingly ask for them, and in some cases process payroll in stablecoin format. For globally distributed teams, stable coins make far more sense than trying to tackle transfers to dozens of different countries via extractive intermediaries and the Byzantine correspondent banking system. On this topic, market has already outmatched central banks. Encouragingly, some central bankers like Fed Vice Chair Randall Quarles have understood the merits of stable coins and have not dismissed them out of hand. Nevertheless, it is clear now that

Starting point is 00:10:39 nothing in money or finance is deemed outside the purview of Washington and the New York Fed. The key question is, once they get a hold of them and regulate them, quote, appropriately, how will they do? As for the consumer benefit of private versus public money, one only has to consider what happened after the free banking episode in the U.S. monetary issuance was centralized in the hands of the state, which promptly inflated away everyone's savings during the Civil War. Curiously, the central bankers touting the benefits of public money omit that part of the story. All right, back to NLW now with just a quick set of thoughts.

Starting point is 00:11:12 I think that the key thing here that's so important is Nick contextualizing this discussion of stable coins as a power of state question. I think that that's right. And I think that the other thing that he points out, that we could go even farther on, is that the money system we have today is not simply a state system. In fact, it is a huge, complex melange of private and public actors working together. In many ways, like Nick is arguing, I think that privately issued stable coins pegged to the U.S. dollar are the natural extension of the system we've built so far, rather than some abrogation of it. A CBDC done entirely

Starting point is 00:11:51 by the state would inevitably put more hands in the power of the state. It would threaten commercial banks that would threaten all sorts of different parts of the existing system we have. The good news about that is that there are likely a lot more allies than it seems when it comes to how to resolve this question. And ultimately, there are many in the U.S. who are extremely pragmatic, who will look at China's trials, millions of dollars here, millions of dollars there, compared to $110 billion dollars of U.S.D-based stable coins issued over the last few years. Currently, the private market is kicking the slats out of the central banks when it comes to a new form of digital stable currency, and the U.S. would do well to integrate that rather than outlaw it. But if there's ever been

Starting point is 00:12:36 an example of me preaching to the choir, it's probably around that. So for now, I will say, I hope you enjoyed Nick's excellent walk-down history lane. And until tomorrow, guys, be safe and take care of each other. Peace.

The Breakdown - Using History As A Weapon: The Latest Political Attack on Stablecoins

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