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Comment by Barrera | Hacker News Reader

Here's a different thought experiment.

A sponsor organization maintains a stable coin pegged 1:1 to the US dollar. The token is bought and sold on the open market to keep the peg.

Because it works so well, demand for the stable coin rises for years on end, resulting in the issuance of trillions of dollars worth of stable coin. Eventually the stable coin market cap hits 50% of all US dollars in existence. Numerous audits prove that the dollars are indeed responsibly held by the sponsor.

Now, what specifically are the assets being held by the sponsor?

This might seem like a trick question, but it's not. In what form would a stable coin of that magnitude keep its assets to ensure sufficient liquidity that the peg is never broken and can't be attacked successfully?

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It feels to me like a logical conclusion would be to have a government manage such a stablecoin. But at that point, it's just normal money but less convenient.

well normal money, but in a revolutionary form factor. metal coin usd -> paper usd -> crypto usd

Smaller jump then gold -> usd -> btc which actually means changing the global reserve currency.

If you think about it didn't the U.S. government did a similar thing by gold. USD was pegged to gold initially, then they changed it.

I think you missed a step:

metal coin usd -> paper usd -> digital usd (closed, permissioned system) -> crypto usd (transparant, permissionless system)

The jump is a lot less between digital and crypto should be small.

true, revolutionary (compared to even digital usd) as in It shouldn't require a third party (aka bank etc) for 2 individuals to transact.

No bank involved, but for every transaction you burn down an unspecified amount of the Amazon rainforest. But hey, you win some, you lose some.

You always need a 3rd party for two individuals to transact. It's banks for dollars, miners + the whole infrastructure for crypto.

In principle, miners or the infrastructure maintainers could be forced to never mine your transactions (well, transactions to/from particular wallet IDs), by the way. It would be of course harder, since your money is in a single bank, but all miners would have to agree to the ban for it to work.

>It feels to me like a logical conclusion would be to have a government manage such a stablecoin.

I think you give Governments far to much credit, they can’t even manage to peg the penny to 1cent or a nickel to 5cents.

In 2020 a penny cost 1.76cents and a nickel cost 7.42cents.

You’re confusing seniorage with value..

Seniorage is the profit between cost of producing currency and the value of the currency.

Technically there is no seniorage when there is a loss, historically it was called an inflationary tax, meaning a loss in value to the existing money supply you hold.

I think you're mistaken -- seigniorage is the difference between the cost and the value, it doesn't need to be a profit. Negative seigniorage is still seigniorage and many such papers treat it as such, e.g.;

https://sci-hubtw.hkvisa.net/10.2307/3552184

>Negative seigniorage is still seigniorage and many such papers treat it as such

Notice how you qualify your statement as many such papers treat it as such.

Yes, you can find some people, articles that refer to a loss as seniorage, but that’s a misuse and inconsistent with the actual definition. That’s also why when they do use the term improperly they typically add “negative”, specifically because the definition of Seniorage refers specifically to revenue/profit from printing money.

I think Ambani (the Indian billionaire) actually made some of his money in early fays melting down coins, and did it at such a scale government officials had to investigate what was going on

In the US it’s not illegal to melt pennys, but it’s illegal to melt pennys to profit on the raw materials.

Interesting side story: for centuries coins were intentionally made to have a ribbed side surface because otherwise people would sand/cut off the sides and sell the obtained metal.

Nowadays coins are usually not made of pure and/or very valuable metals, but the notches have stayed to help impaired people and automatic identification of coins.

Why do you think this would be best facilitated by a government as opposed to a large group of stakeholders?

Because if it's that central to the economy, representing half of all outstanding dollars, it needs to be managed centrally or bad things are gonna happen?

I mean who watch the watcher, we have democracy for the government right. Even that's an oversimplification, we have the 3 branches and check and balance so that everyone watches everyone else.

>Even that's an oversimplification, we have the 3 branches and check and balance so that everyone watches everyone else.

The Federal Reserve, which manages the current currency, was explicitly made independent of such checks and balances.

Because it’s easy to credibly promise someone their claim is worth X dollars when you (and you alone) control the creation of dollars.

I've been annoying people lately by referring to Black Wednesday as "the collapse of the stablepound against the algorithmic stablecoin the ERM". https://en.wikipedia.org/wiki/Black_Wednesday

This depends very much on the definition of "all US dollars in existence".

If I put a dollar in my savings account and the bank loans it out to someone else, who has the dollar? It's on my balance, but it's in their pocket. How many dollars are there?

This is the question of money supply, it's very complicated but the TLDR is there is no fixed "all dollar" amount. This scenario just further muddies the question, but also explains why stable coins keep central bankers awake at night.

> If I put a dollar in my savings account and the bank loans it out to someone else, who has the dollar?

Note that for every dollar you put into a U.S. bank account that's subject to reserve requirements (I believe just checking accounts?), the bank can loan out much more than 1 dollar, based on the legally required liquidity ratio or "reserve requirement ratio."

Note also that since 2020 that reserve requirement ratio is zero.

That is a common misconception that got started as a misunderstanding of Milton Friedman's (reasonable) money multiplier equation. Banks cannot lend more money than they have - if they could, then you could start a bank and multiply your own money. The money multiplication that banks can do is take the money that party B has received for selling something and loan it back to to party A, who can use it to buy something from party B again.

A zero percent reserve requirement does not lead in all cases to infinite inflation, because banks are also afraid of a default. Bank's desire to avoid defaults adds another fraction to their reserve ratio and limits money multiplication even when the Fed would technically allow it to proceed infinitely.

Another thing you should know is that Fed chairmen have said that Friedman's equation underestimates bank's ability to create money, because in practice the Fed will allow any bank that desires liquidity to borrow it. The Fed, especially post-great-depression, will happily loan banks however much they needed to cover their reserve requirements, meaning that even before the ratio was set at zero, the number of times a single dollar could be spent was decided primarily by a balance of interest rates and fear of defaults.

Is there a misconception in the text of my previous comment? You seem to be describing a misconception that as far as I can tell isn't one I hold or one I expressed in my previous comment.

> loan out much more than 1 dollar

They can't loan out more than the deposits they have.

Why not? A bank could have 0 depsitors, but could have received money from investors.

That's not the sort of bank being talked about here in terms of "money multiplication." That's more like a VC firm or other institution.

If you could open a bank, accept 10 dollars in deposits, and loan out 100, you'd do it! You'd loan it out to your best friend and keep the cycle going until you're rich AF.

You can't loan out more than you have, but even loaning out 10 of 10 dollars has some risk - if someone comes for their money and you can't get your money back from the people you loaned it to. And it definitely increases money in circulation since it's not parked there. But it's not a magic money printing machine.

The Federal Reserve says you may loan out 100% of your deposits. They didn't say you could loan out however much you have in investors' money, or 200% of your deposits.

The misconception in your comment is that the reserve requirement is what limits a bank's ability to create money by extending loans.

I'm no expert, and I know that banking is a lot more complicated in practice, and that reserve requirements in the U.S. (even before they went to zero) were apparently not a significant factor in what actually put a ceiling on banks' ability to lend. There were apparently all sorts of tricks banks used to not be bound in practice to reserve requirements.

Yes, reserve requirements are not a significant factor, because in addition to reserve requirements banks are also subject to capital requirements. Moreover banks need reserves to operate anyway regardless of whether they're mandated by law or not. Finally they're also constrained by the demand for loans, which isn't infinite.

it's the capital requirements or capital to risk weighted assets ratio that restrict lending, not reserve requirements. reserve requirements are to protect runs by depositors and capital requirements are to protect the bank against bad loans.

at the end of every month and especially every quarter the bank submits its capital ratio and a bunch of other calculations to the regulators. if the ratio isn't good it has to increase capital reserves. if the ratio is good it can do share buybacks and dividends.

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

Can you share some resources where I can learn about this? Thanks

The reserve requirement ratio does not do what you think it does. It is the amount of money that the bank is required to keep in its account at a Federal Reserve Bank as a ratio of deposits. Note that literal cash sitting in a vault does not count one iota towards satisfying this reserve ratio.

Bank regulations have moved one from having such a specific requirement. Nowadays, you essentially need a minimum amount of equity per risk-weighted assets. So you need something like $8 in cash for every $100 in loans you give out.

> but also explains why stable coins keep central bankers awake at night.

Can you elaborate on this?

The sounds of the crashes are very loud and occur all hours.

There are far more "fake dollars" in the world than just that, even.

Ask someone with non-cash investments their net worth. They'll give you a number that includes a lot of non-cash assets. They can borrow against them. They expect to be able to cash many of them out, so they often spend as if they're "real" dollars. But they aren't "real" printed dollars.

> If I put a dollar in my savings account and the bank loans it out to someone else, who has the dollar?

I don't think that's how banks work; at least in the US and England.

Below is an extract from an excellent article/tutorial from The Bank of England[1]

In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

The reality of how money is created today differs from the description found in some economics textbooks:

1. Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.

2. In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.

[1] https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

You don't need crypto to know how this experiment ends.

It was called the Argentinian Peso, and it was pegged to the dollar. It didn't get to 50% of the existing dollars, it crashed and burned way before that

Your question is a trick question because the first few assumptions beg all the detail that would be required to answer the question.

But fundamentally if you were to reach that size the assets you were using to collateralize the coin would in some sense have to have some leverage against the coin itself. Ie be loans backed partially by the coin or something. But because you can’t pull yourself up by your own bootstraps that would never work, and because 50% of all the US dollars in existence is a mindbogglingly large number no player in any market could ever be that large. In particular, regulation actually prevents you from being that large in lots of important ways. For example if you try to participate in equity markets more than a certain percentage you will have your exchange access shut off and you will be investigated for trying to run an illegal market corner. Even if you set regulation aside, as you try to buy 50% say of a government bond issue to have those assets to pledge you will find the price moves further and further against you. This is the supply/demand mechanism forcing you to give more than 50% of the dollars away to other market participants meaning you can never get to the goal that you mention in your hypothesis.

Quite separately your thought experiment doesn’t apply to the situation Vitalik is talking about- he specifically says in the article he is talking about pure algorithmic stablecoins rather than ones backed by assets held by custodians of the type you mention here.

My guess is low risk debt. Most likely treasury bonds would be the majority of their holdings.

Is there enough supply of treasury bonds and other low risk debt to do this?

There are $23T treasury bonds outstanding, which is more than enough to back the $6T "M0" US money supply.

(This is kind of an exceptional circumstance, though)

I guess they need to be an actual US based bank themselves to hold that much cash/bank deposits. And to also be trustworthy.

I have a simpler thought experiment. Every time you own a tether, you buy it for a dollar. That dollar goes into a large room. Now each tether is backed by a literal dollar. What’s the problem? I can’t wrap my head around what’s so hard about this.

What happens when a bunch of literal or metaphorical rats eat the dollars?

Who pays for security for the room with the dollars?

Okay buy US government bonds with them. What else am I not seeing?

Now you have a drawdown and bond prices have declined because interest rates increased. Whoopsie, you’re fucked.

I was referring to fixed rate bonds. Alternatively charge 1% on each transaction for security.

> Eventually the stable coin market cap hits 50% of all US dollars in existence. Numerous audits prove that the dollars are indeed responsibly held by the sponsor.

> Now, what specifically are the assets being held by the sponsor?

By definition, they hold every dollar in existence. Holding any other type of good would wipe them out as soon as the exchange rate to the dollar changed.

> In what form would a stable coin of that magnitude keep its assets

US Treasury bills?

Can they put it in a bank? Do banks have maximum account sizes?

In practice, yes. Because you're just pushing the backing question on to them; banks rely on withdrawals being de-correlated. Not everybody takes their money out at once. A single bank-sized account ruins that model.

Also, the larger it gets, the bigger the money laundering question gets. "We're providing seventy billion dollars of financial services to unknown parties" is not a sustainable position with a reputable bank. Tether have already got banned from several banks and are being very cagey about who they bank with.

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