very good, very clear - stablecoins are banks, from an economic perspective. their proponents will say they're narrow banks, cynics will say they're unregulated banks www.ft.com/content/625f... - ThreadSky | a Reddit-style client for Bluesky

dsquareddigest.bsky.social • 7 days ago

very good, very clear - stablecoins are banks, from an economic perspective. their proponents will say they're narrow banks, cynics will say they're unregulated banks
https://www.ft.com/content/625f9f0e-0144-4bc4-99e2-571ab64ccbe9

Comments

wndlb.bsky.social•7 days ago

I don’t see the problem; the history of unregulated banks has been good, hasn’t it? #PanicOf

charlesrandell.bsky.social•7 days ago

Is what happens to the yield on the underlying part of the debate? If I’m not remunerated then are they more like commercial bank sight deposits before depositor protection? If I receive the yield on the underlying (after fees) then do they look a bit more like MMFs?

dsquareddigest.bsky.social•7 days ago

It is part of the debate because if there is zero upside and only downside risk, there is significantly more incentive to redeem immediately at the first sign of trouble.

randybarrineau.bsky.social•7 days ago

More like a stable value money fund but thanks for sharing this good piece.

nrbq.bsky.social•7 days ago

The proper high regulation approach to stablecoins is treat them as banks. The appropriate low regulation approach is to treat them as money market funds.

nrbq.bsky.social•7 days ago

This former mmf regulator is biased, but it seems like stablecoins are closer to mmfs than to banks.

dsquareddigest.bsky.social•7 days ago

The guarantee of repayment at a fixed value counts then out of being funds as far as I can see

nrbq.bsky.social•7 days ago

That describes mmfs pre-Lehman. And post Lehman, Fed/Treasury propped-up mmfs during March 2020 covid market turbulence. So the implicit guarantee of mmfs is still pretty strong.

peark.es•7 days ago

I guess my question is, let's take as given that a stablecoin is invested in MMMF-like assets (say, T-bills). What does a run on that stablecoin even look like?

Now, we've assumed a can opener, so fair enough we should come back to that assumption, but still think it's a good thought experiment,

warrenterra.bsky.social•7 days ago

We've had a bunch of runs on "stablecoins" and in every case it turned out they weren't backed by the assets they claimed to be backed by.

There's selection bias of course - that's the situation that generates a juicy story. Still, in this deregulatory environment, seems concerning.

dsquareddigest.bsky.social•7 days ago

Well it might start for a lot of reasons (say the beginning of a FBI investigation), and then someone has to a) find out how far the investment policy drifted from nothing but on the run T-bills and b) actually work the orders to turn the bills into cash by end of day.

peark.es•7 days ago

yeah very clearly portfolio risk drifting is the big thing here.

dsquareddigest.bsky.social•7 days ago

I think also operational risk; both in the literal sense of keeping track of everything (big problems if you rely on the blockchain to settle lots of redemption requests quickly I think) and in the sense of poor compliance.

dsquareddigest.bsky.social•7 days ago

I mean we've got one big stablecoin player whose main use is to channel international payments to the family of a prominent US politician, it would be irritating if they had to come up with $5bn stet because someone else changed their PEP policy

dfinberg.bsky.social•7 days ago

If you are allowed to buy the stablecoin in something other than the stable asset, you have a pretty big trade risk as well. If you want to take bitcoins in and then trade them yourself while selling your stablecoin, you're pretty open to a big shift in one day.

bancsutherland.bsky.social•7 days ago

Possibly a dumb question, but does “end of day” itself create any issues? Given MMFs trade once a day on schedules that mostly align with T-bills, etc., and coins do not?

dsquareddigest.bsky.social•7 days ago

This is actually a good point; I don't know enough about stable coins to know what their intraday redemption arrangements are, whether they build up credit lines with banks etc

ipsofactotum.bsky.social•7 days ago

Hmm maybe like Tether circa 2017? Commercial paper is considered liquid enough for MMFs. So I just wonder about this part of the genius act: “or similarly liquid assets as determined by the primary regulator”

archiecarter.bsky.social•6 days ago

Decades of experience managing risk across lines of business versus a start up with more funding than they have competent professionals to manage

robarmstrong.bsky.social•7 days ago

I'd say narrow bank = assets only fed deposits. Everything else = bank.

usagi3939.bsky.social•7 days ago

📌

businesspikachu.bsky.social•6 days ago

I thiiiink EU has partly picked up on this in MICA. At least they require stablecoin issuers to have auditable and liquid reserves:

https://legalnodes.com/article/mica-regulation-explained

businesspikachu.bsky.social•6 days ago

(I'm posting an article from a company that will help you get a company set up in British Virgin Islands, so idk if I found the best source)

hermgamma.bsky.social•7 days ago

The idiocy around ‘stablecoins’ is that all the carry goes to the issuer. Further risks are operational in as far as moving lots of cash around in complex legal layers conducted by novices is not risk free, and in credit as issuers may reversing in or buying outright juicier risk which can lead to…

hermgamma.bsky.social•7 days ago

… to breaking the buck and a gumming up of the stablecoin and by extension T-Bill market. The Treasury relies on the latter far more than is prudent. It’s the garbage truck caught in an off angle some time before it consumes a protagonist exactly in the way it had been predicted.

michaleenoge.bsky.social•7 days ago

Cynics are what criminals call people not in on the grift.

sohasu.bsky.social•7 days ago

One could always choose to see them as being both narrow *and* unregulated banks.

dsquareddigest.bsky.social•7 days ago

not really - a narrow bank which isn't prevented by its structure and regulation from investing in illiquid assets isn't narrow in the relevant sense.

sohasu.bsky.social•7 days ago

I intended the response to be read as a joke on the doublespeak of the crypto industry - in crypto, stablecoins aren't stable, cryptocurrencies are neither crypto nor currency, so why not "narrow" banks that aren't that in any way?

pauljdavies.bsky.social•7 days ago

How are they banks? They cannot create credit or deposit liabilities. They are money market funds surely if they're back by anything - or magic beans that might as well be meme coins if they're not...

dsquareddigest.bsky.social•7 days ago

They guarantee repayment at a fixed value, so they have the same run dynamics as banks and the stable coins are, economically, deposit-like liabilities.

pauljdavies.bsky.social•7 days ago

But why are they economically deposit like? Deposits have much more maturity/liquidity transformation behind them. Stablecoins have MMF like assets (they’re more like a capital markets instrument than a bank instrument). Is it because they are a liability of the issuer rather than a look-through

dsquareddigest.bsky.social•7 days ago

Yes that is the main reason; I've said it on another thread that they are basically "mmmfs, minus all of the things that might justify treating mmmfs differently from banks"

jomichell.bsky.social•7 days ago

what are those things -- the strategies they have to manage lumpy outflows?

dsquareddigest.bsky.social•7 days ago

yep, also the (now much better enforced) prohibitions on making anything which looks like a guarantee with respect to breaking the buck, and the fact that they don't usually allow intraday liquidity

pauljdavies.bsky.social•7 days ago

… a look through to a pool?

pauljdavies.bsky.social•7 days ago

They’re runnable for sure but in the same way any fund is runnable no?

blinis.bsky.social•7 days ago

Yes. You are right. Stablecoins are no banks. Don’t get fooled.

stevenkelly49.bsky.social•6 days ago

They’re MMFs on the asset side, but we consistently bail out MMFs—even with their gates and fees. And MMFs aren't materially used for payments @dsquareddigest.bsky.social

robarmstrong.bsky.social•7 days ago

They have less maturity transformation, but not none. The either transform demand payment to 3 month treasuries or, if they are backed by deposits in other banks (as the Genius act allows) they transform into whatever the other bank has on its balance sheet

pauljdavies.bsky.social•7 days ago

But that’s like a money market fund. Ok you can’t use MMFs for payment (though plenty offer check books because America) but payment using a stable coin isn’t redemption so I don’t get how that matters…?

robarmstrong.bsky.social•7 days ago

Well, if they are a payment technology, not just a casino chip, then there has to be redemption into bank money eventually.

pauljdavies.bsky.social•7 days ago

I mean, everything has to be redeemed into commercial bank or state money eventually… but plenty of things exists in lower hierarchy forms for long periods and can be exchanged for other things

dsquareddigest.bsky.social•7 days ago

Bank deposits, for example! This characteristic of "behaviorally stable and long-term, but formally redeemable at par with no notice, in a way which matters during liquidity crises" is the most bank-like thing you can think of!

akgerber.bsky.social•7 days ago

I use a money market fund for payments
https://www.fidelity.com/spend-save/fidelity-cash-management-account/overview

robarmstrong.bsky.social•7 days ago

Well, not to be picky, you are not paying with shares in your money market fund. Your MMF offers a redemption-and-payments service. I think?

akgerber.bsky.social•7 days ago

I think you are probably right but it's very convenient

smtuffy.bsky.social•7 days ago

The European regulatory mind can’t comprehend this

smtuffy.bsky.social•7 days ago

Yeah, I think MMfunds are a better analogy. Though there are regulators who would like those to be treated more like banking products too (cash is cash, basically)

dsquareddigest.bsky.social•7 days ago

yeah, my reasoning on this is "they are like an MMMF, minus all the things which are the justification for not treating an MMMF as a bank".

smtuffy.bsky.social•7 days ago

I am genuinely curious to see which banks (if any) take on third-party stablecoin demand deposits at any scale.

dsquareddigest.bsky.social•7 days ago

bad quality ones that are desperate for deposits and not subject to LCR/NSFR regulation

csfrayer.bsky.social•7 days ago

Stablecoin Valley Bank, Stablegate Bank and (I didn't have a good one for Signature on short notice, sorry)

smtuffy.bsky.social•7 days ago

Should end well

robarmstrong.bsky.social•7 days ago

Me too. I don't see much evidence that stablecoins work very well for real world scaled up payment problems, but technology is weird.

pauljdavies.bsky.social•7 days ago

Anyone sensible would have relatively low exposure limits and regulators ought to treat them at least as hot as brokered deposits from an NSFR pov

nikkicoates.bsky.social•7 days ago

Me, I think they’re e-money institutions, if we’re going to be European about it.

smtuffy.bsky.social•7 days ago

It’s fun to see asset management and their various industry bodies stay very quiet on this, lest it bring to much attention to MMFunds

pppgrifter.bsky.social•7 days ago

Don’t touch my 4%

theangelofhistory.bsky.social•7 days ago

Sssshhhhhhh!!!!!!!!!!!!!!!!!!!

poliorcetes.bsky.social•6 days ago

Wildcat banks. We have been yelling this for years.

drmke.bsky.social•6 days ago

And unregulated banks it is.

mordantmuppetry.bsky.social•7 days ago

So like Scottish pound?

dsquareddigest.bsky.social•7 days ago

I can see how you might say that, but IMO the electronic payment and redemption features make a difference and make it more reasonable to say that they are just deposits at a particular kind of bank.

timsalzer.bsky.social•7 days ago

📌

theangelofhistory.bsky.social•7 days ago

And how can someone be a lawful narrow bank without a license ?

dsquareddigest.bsky.social•7 days ago

Under the GENIUS Act!

theangelofhistory.bsky.social•7 days ago

Ha ha ha h ha

Tacit acceptance that the entire thing has been illegal for years

heptaglemious.bsky.social•6 days ago

And realists will say they are banks whose deposits are mainly IOUs signed by fraudsters.