Banks are very nervous about stablecoins. Art Wilmarth, writing in Open Banker, summarised what I take to be the view of the banking establishment, saying that because of the “intolerable threats” to banking system stability engendered by uninsured nonbank stablecoins, regulators should abandon the GENIUS Act and instead pass legislation requiring all issuers to be FDIC-insured banks. On this, the banking establishment is wrong. Competition is good and the banking sector needs more of it.
Stablecoins’ Issuers Want To Be Banks
That view, the stablecoins should only be issued by banks, explains why banks’ trade associations have been lobbying against “crypto” firms’ attempts to gain bank charters from the Office of the Comptroller of the Currency (OCC). I should explain for international readers that the OCC is the part of the US Deparment of the Treasury responsible for regulating and supervising both national banks and various other entities, incuding limited purpose charters such as national trust banks, which is the charter that most stablecoin issuers want.
Why do they want a national trust bank charter? Well, under the GENIUS Act, the list of qualified entities that will be able issue stablecoins include bank subsidiaries, state-licensed issuers and, crucically, non-bank issuers that have received OCC approval. Hence, since the Act passed the Senate earlier this year, a number of cryptocurrency firms have applied for national trust bank charters with the OCC. These include Circle, Paxos, Coinbase and now, Stripe-owned Bridge. While this type of charter does not allow fintechs to lend or take insured deposits, it does allow them to issue stablecoins and manage the reserves behind these stablecoins in a federal framework (instead of messing around with 50 different state money transmitter licences).
(Note that unlike a traditional bank charter, a trust charter does not mean a Federal Reserve Master Account and direct access to the payment system, which is why the lobbying around this has already started and Ripple, for one example, has already applied for a Master Account via its New York trust licence.)
The reason that banks have FDIC insurance is because they are fractional reserve banks and vulnerable to runs, but the fact is that a stablecoin backed by high quality liquid assets (HQLAs) such as Treasury Bills is not: if the issuer fails, the stablecoins can still be redeemed against the reserve. If anything, properly regulated stablecoins mean less risk than properly regulated banks.
We have already seen this work in the UK when Wirecard failed. Wirecard Card Solutions was regulated under the UK’s Electronic Money Regulations and provided issuer and payment processing services for many fintechs and prepaid card programs (Curve, Pockit, Anna Money, etc.). When Wirecard in Germany collapsed and the Financial Conduct Authority (FCA) temporarily froze their UK activities, UK customers were protected because of proper regulation. Wirecard in the UK was an electronic money institution (ELMI) so the safeguarding of client funds, enforced by the FCA, ensured that clients’ money was ring-fenced from the company’s own assets and available for transfer to new providers. Thus, while Wirecard’s shareholders were wiped out, customer funds were safe and were transferred.
What does this have to do with stablecoins? Well, in our currrent financial system, money reaches the public through commercial banks, a practical structure that stems from the retail banks role in providing payment services. That privileged role is under attack, however, because not only is there no fundamental economic reason why banks should be the dominant providers of payment services, there is no fundamental economic reason why they provide them at all — see, for example, Radecki, L., “Banks’ Payments-Driven Revenues” in “Federal Reserve Bank of New York Economic Policy Review”, no.62, p.53-70 (Jul. 1999) — and there are many very good reasons for separating the crucial economic function of running a payment system to support a modern economy and other banking functions that may involve systemic risk (eg, providing credit).
Since stablecoins are nothing to do with credit, then stablcoins’ issuers operating under some sort of Federal equivalent of an ELMI licence could provide the kind of competition that would improve services and reduce costs for consumers and businesses alike. Credit institutions, payments institutions and electronic money institutions would seem me to be a decent way to organise the infrastructure.
The ability of OCC national trust banks to issue stablecoins provides a powerful tool for fintechs for many reasons. For example, if a fintech uses these stablecoins to redeem or settle payments, for example, then it appears to be the case that it will no longer need state money transmitter licenses, which will reduce the barriers to competition.
(I think the OCC should actually go further and create a national “narrow bank” charter that would give access to a Master Account and access to payment networks.)
What Kind Of Banks Should Stablecoins’ Issuers Be?
Andrew Bailey, the Governor of the Bank of England, wrote about this recently saying that the fractional reserve banking system as we know it now has come to combine the holding of money with the provision of credit, meaning that deposits directly support lending that underpins economic activity. In short, banks can lend out money that they do not have, but it all kind of works because trust in the system is reinforced by bank regulation, deposit insurance and resolution provisions. However, as Bailey notes, this is not a law of physics but a set of institutional arrangements. It is entirely possible to separate money creation from credit provision, with banks and stablecoins coexisting and non-banks carrying out more of the credit provision role.
For a great many people in a great many circumstances, what they need is a simple, inexpensive and convenient way to pay and to get paid and nothing more. The holding of money in what we might think of as payment accounts, rather than bank accounts, would therefore also extend financial inclusion. Certainly, in the US and many other countries, the way to bring the unbanked into the system is to provide them with digital wallets that could hold be front-ends to payment accounts but also stablecoins.
While it is certainly true that the future of payments will be built on infrastructure where stablecoins operate as part of the settlement layer, stablecoins are a trigger for a wider rethink of institutional structures dating from a previous age. The set of transaction cost optimisations that led to commercial banks providing the economic functions that are often summarised as transfers in space, transfers in time and transfers in scale may well have been right for a offline world but could be rethought for our online world. Neither commercial banks nor central banks are laws of nature.