Bitstape

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Jan 23rd 2023

Can Banks Issue Stablecoins?

Stablecoin regulation is one of the most controversial topics in cryptocurrency. Recent reports from U.S. regulators as well as the Biden Administration have warned that stablecoins could threaten financial stability, although many are skeptical of that claim. Previous proposals sought to regulate transparency, issuance, and licensing of stablecoins, although no legislation has yet been passed.

This debate, however, may be missing an important point: The issuance of redeemable notes by private banks, in paper or electronic form, appears to already be legal in the United States.

Thomas Hogan is a senior fellow at the American Institute for Economic Research. He was formerly the chief economist for the U.S. Senate Committee on Banking, Housing, & Urban Affairs.

Private banknotes were widely used as a medium of exchange for the majority of U.S. history. Prior to the establishment of the Federal Reserve in 1913, banks issued paper notes redeemable for the equivalent amount of some asset, usually gold. Even after the end of the gold standard in 1933, notes issued by national banks continued to circulate, dwindling to around $20 million in circulation by 1970.

Private banknote issuance is common practice in several countries today. In Hong Kong, Scotland and Northern Ireland, for example, private banks issue paper notes redeemable for their own local currencies. Private bank-issued currency is legal in dozens of countries around the world.

Electronic stablecoins are the modern analog to paper banknotes. Stablecoins are crypto tokens whose value is tied to some other asset, such as the U.S. dollar. The total market value of the top four U.S. dollar-linked stablecoins is currently around $135 billion, which although quite large, is modest compared to the U.S. monetary base of about $5.4 trillion.

Most stablecoins are redeemable on demand, just like deposits in a checking or savings account. Tether (USDT), the largest stablecoin by market capitalization, promises redeemability in U.S. dollars. Some stablecoins, such as the dai (DAI) token, require more than 100% collateralization to help ensure token holders’ funds are secure even if the collateral value falls.