Stablecoins Are a Monetary Revolution in the Making

We can be on the verge of revolution in money, which is a century long dream of many important economists. Financial innovation places the foundation for its dream, just as the US political economy is moving to support it. This revolution, if it continues, has the main consequences for global finances, economic development and geopolitics and creates many winners and losers. The shift I am talking about is “narrow banking” built on stablecoins. If they are unknown concepts for you, let me check 800 years of financial innovation in 500 words.

Origin of a fractional reserve banking

Our current financial system is based on the concept of banking fractional reise. In the 13th and 14th centuries, the Italian Cum Bankers’ money inverters began that because the depositors (rarely) demand their money back at the same time, they could only have a fraction of the coin needed to support their deposits. Not only was it more convenient, but it also facilitated payments over long distances: rather than send gold coins through dangerous roads, a Medics In Florence, it is necessary to send a letter to his agent in Venice, who instructed him to debit one account and credited another.

Although it is normally highly profitable and effective for payments, Fractionless Banking has a disadvantage. Its natural lever effect makes the system unstable. A decline in the economy could cause more deposits to choose savings at once or even worse, to generate rumors that loan support deposits will fail, causing “running” in the bank. The bank unable to meet the requirements of its deposits will collapse into bankruptcy. But more than just the wealth of deposits is lost when banks fail in a fractional system. Because banks generate loan and make payment easier, economic activity is seriously narrowed when banks fail, because the payment for goods and services is disturbed and lending is not available for new investments.

Governments are trying to solve their problems

Over the centuries, when banks have become and more critical for economic functioning, governments have come to try to reduce the risks of banking crisis. In 1668, Sweden rented the first central bank, Riksbank to lend to other banks to experience running. The Bank of England followed 26 years later. Although it helped solve problems with liquidity (banks with good assets, but insufficient cash), it did not stop the solvency crisis (banks with bad loans). The US created deposits insurance in 1933 to help stop banking runs based on solvency, but as illustrated by many banking crises, including the US mortgage crisis in 2008, or deposits or banking capital regulations did not resolve the endemic fragility of banking fraction. Government intervention has only reduced the frequency of crises and shifted its costs from depositors to taxpayers.

Economists build a better mouse trap

Around the time when Roosevelt’s administration introduced deposits insurance, some of the highest names in economics at the University of Chicago hatched another solution: the so -called Chicago Plan or “narrow banking”. During the US savings and the credit crisis in the 80s and 90s.

Narrow banking solves the central problem of fractional reserve banking by separating critical functions of payments and making money from the creation of the loan. Many people think that central banks create money. But this is not true in a fractional reserve system: YES banks. Central banks manage the rate for which banks produce money (controlling their access to reserves), but money is created by banks whenever they lend money, which magically generates the corresponding deposits in this process. This system – and its messy rest – combines the growth of money to the growth of loans and through network effects of banks on payments.

The division of banks in two

The Chicago Plan separates critical functions of money and payments from the loan by distributing bank functions into two. “Narrow” banks that accept deposits and facilitate payments are obliged to support their deposits for one with safe tools such as T-Bills or Reserve Central Bank. Think of them as a debit card fund. Lending is carried out by “wide” or “business” banks that are financed with capital capital or long -term bonds and are therefore not subject to running.

Thanks to this segmentation of banking, each function is safe from others. Deposit runs are eliminated because they are fully supported by high -quality assets (and also access to the central bank). Since narrow banks facilitate payments, their security removes the risk to the payment system. Since the money is no longer created by creating loans, poor lending decisions in commercial banks do not affect cash, deposits or payments. On the contrary, the natural fluctuations in the economic demand for money-sms or recession-ani concerns about the quality of loans do not affect the lending of commercial banks because it is financed on long-term debt and its own capital.

But why didn’t we accept this amazing solution?

You may now ask, “If narrow banking is so amazing, why don’t we have it today?” The answer is double: the transition is painful and never existed a political economy to support legal regulations.

Because narrow banking requires 100% of deposits either by T-Bills or Reserve Central Bank Reserve, the transition to narrow banking would require existing banks to either call their loans, which dramatically reduced the offer of money, or if buyers without banknotes could sell their credit portfolios. Both would cause a massive credit crisis and the first would cause problems with liquidity and payments.

As far as the political economy is concerned, a fractional reserve banking is extremely profitable – a “theft license”, as my father calls (admirable) – and creates a lot of jobs. Economists, on the contrary, are a small group that is satisfactory about themselves. As anyone in Washington will tell you, DC will tell you, the Association of the American Bankers Association (ABA) is one of the most powerful lobby in the city. The same game with different actors runs in London, Brussels, Zürich, Tokyo, Et Cetera. Therefore, the continuation of the fractional reserve banking is not a banking conspiracy; It was just a good policy and a cautious economy.

Financial innovation meets the sorting of policy

It doesn’t have to be. The cost of the transition and the political economy has changed, especially in US development in decentralized funding – aka “defi” or “Crypto” – and random development of the US political economy, national interests and financial structures created conditions that brought the US shift in the US.

Let’s start with the critical development of defi: rapid growth of stablecoins. Stablecoins are decentralized “digital dollars” (or euro, yen, et ctera). Unlike the Central Bank digital currencies (CBDC), which are issued, deleted and settled by centrally central banks, stablecoins are privately created “digital chips” (electronic records). Like cryptocurrencies, ownership and transactions are stored and cleaned through blockchain technology on distributed books (decentralized registers). The combination of non -changeability of blockchain and generally replicated registers facilitates confidence between unknown parties without government guarantee.

Stablecoins differ from cryptocurrencies in establishing fiano currencies, gold or other value stores that are “more stable” than bitcoins or other cryptocurrencies. They have been designed to be on-and off-ramps between the traditional world of Fiat Money and the world of defi and cryptocurrencies based on blockchain, and to provide a stable “blockchain” account to facilitate trading with definition. However, the case of the use of Stablecoins has developed significantly in the magnificent growth of acceptance and use. Stablecoin volumes annual transaction by March amounted to $ 35 trillion, which is more than doubling the previous 12 -month period, while users have increased by more than 50% to more than 30 million and outstanding stablecoins reached $ 250 billion.

More than 90% of Stablecoin transactions still include either ranking or expanding, but the growing proportion of transactions growth includes the “real world” of use. The key source of growth was transactions between people and trade transactions in countries with unstable local currencies such as Argentina, Nigeria and Venezuela, but one of the largest growing use of global remittance of migrant work, more than a quarter of a whole estimate.

With the help of a congress

Stablecoins ever faster acceptance and growth as an alternative payment system is close to Trump’s administration and congress to institutionalize them.

How do stablecoins maintain their value versus a specific currency such as a dollar? Theoretically, each stable coin unit is supported for one with the currency to which it is linked. This has not always been the case in practice. However, US legislation defines what is acceptable to high -quality, liquid assets (HQLA), ordering a pad of one for one, and requires regular audits to follow compliance. Congress thus creates a legal basis for entities that (1) take deposits; (2) are obliged to fully store HQLA deposits; and (3) facilitate payments in the economy.

Leave VU

Does that sound familiar to you? Isn’t that a narrow bank?

There are several missing pieces. Most remarkably, neither genius nor stable actions provide stable issuers of Stablecoin access to the federal reserve system and does not define stablecoins as money for tax purposes. The omitting access to the Fed is likely to reflect both the necessary caution to avoid undermining the fractional banking system of the reserve (too fast) with direct competitors and lobbying ABA to protect monopol banks. But there are also interesting breadcrumbs that indicate the protection of banks, can be temporary and only long enough to switch to a narrow banking model: between approved HQLA for Stablecoin issuers in both accounts are reserves in federal reserve, currently accessible only by banks.

Shift in political sand

Last year, Trump Trump’s turning to crypto and both congress houses that move to normalize Stablecoins reflect a deep shift in the American domestic political economy and its feeling of national interests. Bipartisan populist anger in Banks and their relationship with Washington has not disagreed since the global financial crisis. QE Fedu and recent policy inflation mistakes have only increased populist fury. This is just like a part of the crypto phenomenon like a fomo.

However, crypto also created immense new wealth and opportunities for business and created a well -funded opponent ABA. Even institutional asset managers now differ in their traditional allies in banking and salivate the opportunities they see in the defense. The combination of popular basic and economic muscle creates the first political economy supporting narrow banking.

The US now has convincing national interests in the development of stablecoins. First, in a world where China (and other US opponents) is increasingly trying to move US payment systems such as Swift, is an independent third -party payment system that prevents the country from imprisoning in the Chinese payment system. Another national interest is the one who Finance Minister Scott Bessnt is constantly mentioning: System shift towards a narrow banking based on Stablecoin creates “one of the largest merchants of American T-Bills”.

And a new financial architecture

The American financial structure has become much more helpful to an undisturbing transition compared to its history or in relation to other countries, which gives it an advantage over opponents. While the US has long been less dependent on the loan than other major economies due to the greater use of the market bond markets and securitized mortgages, the so -called “shadow” banking has done this even more. Bank credit in the US is a little more than a third of the total loan to a private non -financial sector. The rest is provided by bond markets and shadow sector, which are actually wide or commercial banks that are expected according to Chicago plan.

The economic, geopolitical and financial consequences of transition to narrow banking based on Stablecoin in the United States are huge. This would create important winners and losers in the US and around the world.