Comment by vineyardmike | Hacker News Reader

Comment by vineyardmike | Hacker News Reader

> To address risks to stablecoin users and guard against stablecoin runs, legislation should require stablecoin issuers to be insured depository institutions, which are subject to appropriate supervision and regulation, at the depository institution and the holding company level.

> To address concerns about payment system risk, in addition to the requirements for stablecoin issuers, legislation should require custodial wallet providers4 to be subject to appropriate federal oversight. Congress should also provide the federal supervisor of a stablecoin issuer with the authority to require any entity that performs activities that are critical to the functioning of the stablecoin arrangement to meet appropriate risk-management standards.

> To address additional concerns about systemic risk and concentration of economic power, legislation should require stablecoin issuers to comply with activities restrictions that limit affiliation with commercial entities. Supervisors should have authority to implement standards to promote interoperability among stablecoins. In addition, Congress may wish to consider other standards for custodial wallet providers, such as limits on affiliation with commercial entities or on use of users’ transaction data.

AKA StableCoin operators should be banks. (Stable Coins will be bank notes)?

Stablecoin issuers are already effectively banks. In particular, wildcat banks:

https://en.wikipedia.org/wiki/Wildcat_banking

Spoiler alert: there's a reason we had 150 years without wildcat banks.

The popular conception of the so-called free banking era, and the cause and prevalence of wildcat banking, is wrong.

https://www.alt-m.org/2021/07/06/the-fable-of-the-cats/

Even the Cato blogger here concedes that wildcat banks failed more often and were probably fraudulent from the beginning some of the time (but you can't prove it!). His argument more or less boils down to regulation being inherently bad, therefore it's worth it to try this all over again with stablecoins, in case it works this time, also sometimes people got back like 95 cents on the dollar so if you don't count those cases as wildcat banks the story looks a lot better. Not surprising, but it's a lot of words to make such a banal point.

You've totally missed and mischaracterized the point of the article. That wildcat banks failed was never in dispute. They failed, by definition.

As the monetary historian notes, wildcat banks were very rare, and the cause of wildcat banking was not, as alleged, lack of centralized regulatory gatekeeping: the failures were generally directly due to regulatory intervention that exacerbated risk, like prohibitions on bank branching which precluded diversification.

I mean it's published by the Cato Institute. Regulatory gatekeeping is the root cause of all problems.

Joking aside, I didn't see the prohibition on branching specifically called out, other than to say that Scotland (which did allow it) did not see banknote discounting, and that ultimately it was the 1864 National Banking act which finally ended the practice.

The most common thread it seemed to be were that banks held confederate bonds and caused massive losses after the war broke out.

Ironically I think the author makes an excellent comparison between Wilcat banking to Stablecoin. I've replaced a few key words like "notes" and "loans" and "currency" with coin and stablecoin:

> Nor did they make any loans, their profits having instead consisted entirely of fees drawn on the transactions from their stablecoins. "People needed the coins they produced at a time when money was scarce," Du says. "So the community acquiesced in their conduct."

> But, the debate continues, if the public "acquiesced," in what sense can the stablecoins be said to have bamboozled it? Would having no stablecoin at all to trade with really have been better than having to rely on suspended ones?

Where it explains the harm done by the prohibitions on branching:

>>Thanks to the combination of a large country, poor (though rapidly improving) transportation infrastructure, and unit banking, when notes traveled any substantial distance from their source, getting them redeemed could be quite costly. In smaller nations, and especially those, like Scotland, where banks were allowed to branch nationwide, banknote discounts were unknown: the fact that there were many different banks of issue, with varying assets, didn't prevent such nations from having "uniform" banknote currencies. Even Canada, which was geographically as large as the United States, but much less populous and with a far less developed internal transportation system, managed (with the help of several private clearinghouses) to achieve a uniform currency, based on the notes of several dozen commercial banks, by the early 1890s.[4]

>>Had it not been for unit banking, the United States might well have had a uniform state banknote currency before the Civil War, thanks to its by then impressive railroad network. Even with unit banking, it came a lot closer than most people realize. Despite already having had over a hundred banks of issue at the time, with hardly any branches, New England managed, with the help of the Suffolk System—an early, Boston-based banknote clearinghouse—to achieve a uniform currency as early as 1824.

But yes, the most harmful restrictions were those barring banks that didn't hold the state-mandated reserves, which made banks, and the money supply in general, susceptible to changes in public finances, and made those changes systemic in nature, since all banks were affected in the same way, and at the same, by a change in the availability and value of the statutory reserve assets.

> They failed, by definition

That's not what "by definition" means...

This article is nonsense, and typical of intellectually dishonest right-wingers. They always claim that it was actually regulation the whole time that caused the problems! Wow! Yet we can look at the regulations the author cites, and what were ultimately the reasons for the end of wildcat banks, and see those were obviously not the cause.

Regardless, the lessons learned are still applicable today. Whether wildcat banks were common or not doesn't change that most cryptocurrencies mirror the failed wildcat banks of the past.

By definition, a wildcat bank failed, or came close to it:

https://www.britannica.com/topic/wildcat-bank

>>wildcat bank, unsound bank chartered under state law during the period of uncontrolled state banking (1816–63) in the United States. Such banks distributed nearly worthless currency backed by questionable security (e.g., mortgages, bonds) and were located in inaccessible areas to discourage note redemption.

As for your criticism: no, the author meticulously details the ways in which regulatory restrictions led to most of the bank failures associated with wildcat banks, and contrasts it with the experience of 19th century British North America, i.e. Canada, and Scotland, which lacked those same restrictions.

You do realize that the publisher of this is very far from a neutral party here, right?

I assume you're referring to the author, not publisher, since the credibility of the publisher of the article is irrelevant to the content of the article. An economist coming to a conclusion that is different from the establishment's, or yours, doesn't make them not neutral. I don't know of any conflicts of interest they have that would make them not neutral.

The author is employed by the Cato institute which has the stated aim of publishing research and policy papers that advocate for the removal of regulations.

While I don’t know that they have a conflict of interest per se, it’s absolutely reasonable to suspect their writing to be mission driven, not pure research.

The author developed the view that free markets facilitate economic coordination long before joining the Cato Institute, and has enough statute to presumably not need the employment.

>>it’s absolutely reasonable to suspect their writing to be mission driven, not pure research.

Perhaps, but really the author provides arguments and evidence that can be judged on its own merit.

I meant what I said.

> Stable Coins will be bank notes

What do you call an institution that takes deposits and lends them out, such as by buying ""commercial paper"" that Tether repeatedly talks about? A bank. (Or possibly a money market fund)

You call it a 0% interest money market fund. You do not call it a bank. A bank does something entirely different: create 'bank loans'. A non-bank does not have the ability to create bank loans.

> A bank does something entirely different: create 'bank loans'. A non-bank does not have the ability to create bank loans.

I agree with you, broadly, though I have to comically point out that Tether was absolutely also originating loans.

This might be right (though to my knowledge, it's not what they claim to be doing). To originate a loan, Tether would simply issue and lend their coin (Tether), specifically ignoring dollar backing. Can you provide a discussion of them doing this?

> A non-bank does not have the ability to create bank loans.

A decentralized derivatives protocol can lend its credit balance (and fractions of its stablecoin balance, if it exists at all at the point when a position is opened) to a decentralized liquidity pool when there is demand by end users to open a position (ex. a user can deposit frax to buy options/forwards/interest rate swaps/etc against a liquidity pool while the exchange allows the pool to borrow collateral into existence [and destroyed when the users position is closed, modulo the type of derivative the user bought]) without the liquidity pool providing all or any the collateral to back the position if it ends up moving against the liquidity pools exposure.

Such a protocol can also issue debt against their stablecoin flows in accordance the protocol code, that can also float on a dex at a premium or a discount and also be used as collateral in other decentralized stable coins that allow for differing collateral underlying (like some decentralized credit/debt backed stablecoins out there now, or allow themselves to be collateralized by any combination of ERC20 underlying).

This sounds like credit, but not credit origination. If new units of the numeraire are created, that is origination akin to a bank loan. If not, that is not origination. I don't know of an English term that describes 'not originated' lending, as everyone sees to use the term 'lending' for both behaviors. What do you mean by 'borrow collateral into existence'?

> This sounds like credit, but not credit origination. If new units of the numeraire are created, that is origination akin to a bank loan.

New units of stablecoins are being created out of thin air, but the catch is that they can only be used on the exchange (technically, it could be spent else where if other contracts wanted to use it), and if there is a shortage of actual stablecoins when someone tries to withdraw their credit balance, they will receive debt tokens that are redeemable from the exchange for stablecoins at an interest (collateral requirements will be raised for all actors if credit balance > stablecoin balance, and lowered when the opposite is the case).

> What do you mean by 'borrow collateral into existence'?

In this case, in order for the credit balance for an address to increase typically, a user will need to deposit stablecoins into the exchange and their credit balance gets incremented by the same amount (their credit balance is used to buy derivatives).

However, in the case where a liquidity pool is borrowing from the exchange, the credit balance is increased for the liquidity pool without stablecoins being deposited by the pool (typically a pool will need to have stablecoins deposited into it by liquidity providers in order for the credit balance of the pool to increase, the credit balance of the pool is used as collateral write/buy derivatives).

Tether was invented to provide bitfinex with banking services after the banks refused to deal with them. Not super surprising that regulators are treating this banking replacement as a bank.

I think this is a pretty decent set of recommendations considering the power stablecoin issuers have, personally.

> Stable Coins will be bank notes.

Exactly.

We've seen that card played before.

What card?

Reply on news.ycombinator.com