Reading Zhang and Gorton's paper on stablecoins. Already finding problems with it. This, for example, is massively out of date. Cheques are still used in the US but almost nowhere else, and use of physical cash is declining, replaced by contactless cards.
Er no, it is the price that adjusts in a bank run. The bank maintains par value until it runs out of money, then closes its doors, effectively reducing the price to zero. This is in contrast to MMFs which can deliver less than par value.
Useful table. Imho the BIS's recently-published regulatory framework for stablecoins effectively recommends the second of these - which Gorton & Zhang think would be inadequate. The STABLE Act would be the third. Why is a floating rate (as for MMFs) not included?
There is no reason for 100% reserve backing to cause shortages. Banknotes issued by Scottish banks are 100% backed with physical Bank of England notes held at the Bank of England. Doesn't create a shortage of Scottish bank notes.
The problem with 100% reserve backing is not banknote (or token) shortages, but poor profits for the private banknote or token issuers.
This is not what banks do, whether regulated or unregulated.

At this point I am inclined to junk the entire paper. This is a fundamental error which undermines the entire argument.
Not only is this wrong about what banks do, it's also wrong about what stablecoin issuers do. People don't deposit funds with stablecoin issuers in return for tokens. They buy tokens on exchanges. The stablecoin issuers provide tokens to the exchanges for onward sale.
No way is this a banking model. It's perhaps a broker-dealer model, but broker-dealers aren't necessarily banks. Most are securities dealers. And that, I'm afraid, raises a fundamental question about the nature of stablecoins - a question this paper does not appear to address.
Since the sole purpose of stablecoins is to enable people to profit from gambling on crypto casinos, arguably they should be regarded as unlisted securities rather than, as Gorton & Zhang describe them, "private money".
This statement is not true. New Zealand does not have deposit insurance (though it is introducing it), but has never had bank runs like those experienced in the US in the Great Depression.
In fact MOST countries didn't have the US's Depression-era bank run problem. That arose from the peculiar structure of US banking. G&Z should look at how other countries address the problem of runs, rather than assuming that the US's solution applies everywhere.
Seems Gorton & Zhang didn't enquire into the nature of these "custody accounts". Had they done so, they would have discovered they include unspecified "approved investments". Poor research - again.
Also failed to notice that Circle's attestation reports are months out of date by the time they are produced so are effectively useless.
I want some of what Gorton & Zhang are smoking.
Nononono, this is VERY wrong. Tokens you have bought on an exchange are not remotely equivalent to deposits in a bank.
Sorry, but this is nonsense. Stablecoin holders are not in any sense creditors of the stablecoin issuer. Stablecoins are not debt. And they are not equity either. The holder has no realisable claim on the company - see Tether's user agreement.
This is what happens when you try to interpret a new financial instrument in terms of old ones. G&Z's entire argument rests on a false premise.
dear god. This is NOT the economic definition of a bank. This definition would allow a corporation that funded itself with short-term CP to be called a bank.
The economic definition of a bank is an institution that engages in credit intermediation and maturity transformation - ie borrows short and lends long, profiting from the interest rate spread.
This definition is long established and I would expect an academic of Gorton's standing to get it right.

The definition Gorton uses here is actually the Fed's definition of a bank as a "depository institution". It's a regulatory definition, not an economic one.
You cannot, you just cannot say the economic definition of a bank is an institution that issues short-term debt redeemable on demand. This is to ignore the classical economic role of banks, which is to equilibriate investment and saving.
In the US this classical economic role has been largely taken over by capital markets, but that is not true in the rest of the world. Again, the authors' exclusive US focus leads them to make serious errors.
This may be true in the US, but it is not true in the rest of the world. For example, in the UK, smaller banks might not have Bank of England accounts. They clear through large banks. This two-tier (clearing bank) system goes back a century or more.
it may be reasonable to define USD-pegged stablecoins as a uniquely US problem, but it is NOT reasonable to use exclusively American definitions of "bank" and assume that how US banks work is how banks everywhere work.
FWIW I don't think stablecoin issuers are banks, but that's because they don't perform the fundamental bank functions of deposit-taking and lending, not because they don't have Fed master accounts.
interesting historical aside: when the UK's Co-Op Bank nearly failed in 2014 and again in 2017, a swathe of smaller banks (mainly building societies and credit unions) were at risk of losing access to payments. It was their clearing bank.
G&Z double down on their ridiculously narrow (and economically unjustifiable) definition of "bank". You can have a bank charter, but if the Fed says you can't have a reserve account, you aren't a bank. Eh??? (@GeorgeSelgin please tell me this is nonsense...)
@GeorgeSelgin Anyway the only reason this pair have gone down this particular rabbit hole is their fundamental error earlier in the paper. If they had defined banks as credit intermediaries, they wouldn't have needed to take access to the Fed as the defining characteristic of a bank.
(to be clear, "credit intermediation" in this case encompasses the creation of purchasing power. I do know banks create money when they lend!)
There has never been a case of market volatility causing a seriously destabilising run on a major reserved stablecoin. Market volatility tends to cause runs TO stablecoins, not away from them.

There is no citation for G&Z's incorrect statement here.
I profoundly disagree with the first sentence here. Stablecoins are wholly unlike free banks. Free banks created banknotes to facilitate fractional reserve credit intermediation. Stablecoins create tokens to sell them on exchanges.
Returning for a minute to G&Z's statement that there have been runs on stablecoins: to my knowledge the only stablecoins that have been run on are algorithmic or fractionally-reserved stablecoins. G&Z's definition of stablecoin early in the paper excludes these.
the risks of fully-reserved, partially-reserved and algorithmic stablecoins are wholly different and they should not be lumped together in one category as this paper seems to do.
Er no, this is WAY too black-and-white. People used to bite gold and silver coins to determine their precious metal content and therefore their acceptability as money. Similarly, people found ways of validating paper money. Doesn't mean they had no money.
Astonishing. Haven't G&Z ever heard of the Savings & Loan crisis?
I don't think Gorton should use a paper on stablecoins as a shoe-in for an attempt to change the legal definition of "bank" and "lending".
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