Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability
Board of Governors of the Federal Reserve System
Date Written: July 17, 2021
Gary Gorton is the Frederick Frank Class of 1954 Professor of Finance at the Yale School of Management. Jeffery Zhang is an attorney at the Board of Governors of the Federal Reserve System.
Abstract
Cryptocurrencies are all the rage, but there is nothing new about privately produced money. The goal of private money is to be accepted at par with no questions asked. This did not occur during the Free Banking Era in the United States—a period that most resembles the current world of stablecoins. State-chartered banks in the Free Banking Era experienced panics, and their private monies made it very hard to transact because of fluctuating prices. That system was curtailed by the National Bank Act of 1863, which created a uniform national currency backed by U.S. Treasury bonds. Subsequent legislation taxed the state-chartered banks’ paper currencies out of existence in favor of a single sovereign currency.
The newest type of private money is now upon us—in the form of stablecoins like “Tether” and Facebook’s “Diem” (formerly “Libra”). Based on lessons learned from history, we argue that privately produced monies are not an effective medium of exchange because they are not always accepted at par and are subject to runs. We present proposals to address the systemic risks created by stablecoins, including regulating stablecoin issuers as banks and issuing a central bank digital currency.
Submitted July 19, 2021 at 10:11AM by AwesomeMathUse https://ift.tt/2VXNU17