Thread by @VMRConstancio

Finally: “In a highly anticipated report, the Treasury Department, Federal Reserve and other regulators urged lawmakers to let them police stablecoin issuers like banks with robust capital requirements and constant supervision” Bloomberg: bloomberg.com/news/articles/… 1/

This development reflects the theory and historical experience with bank’s regulation.What specifically defines a bank is the deposit contract that promises to redeem the same amount of money at par.The banks hold assets or credits on the other side of their balance-sheet 2/

Sometimes, those assets go sour and the bank may lose the capacity to honour its deposit liabilities and provide the money due to depositors. In the times of free banking, this happened often and banks would go bankrupt. This changed in the turn to the XXth century 3/

Countries introduced schemes of deposits insurance and minimum capital requirements to the banks. High capital, such at it existed at the time of the 1929 crisis, didn’t prevent the banks to go down because of assets going bad and lack of liquidity 4/

As a consequence, bank supervision was introduced to permanently monitor the quality of banks assets and banks’ liquidity. Even this, of course, does not guarantee absence of bankruptcies in crisis, but the main point of bank regulation is to protect depositor’s money.5/

Stablecoins are crypto-tokens linked to an official currency, mainly the dollar, by keeping the money they collect from clients when they buy them, applied in cash or liquid short-term paper denominated in the linking currency. So, they promise redemption at par in dollars. 6/

Because of the link with an official currency, the value of stablecoins is not volatile as it happens to bitcoin or other similar crypto-assets. These do not have any such link and do not make promises about the value at the time of exchange back to official currencies 7/

The balances hold in stable crypto currencies, are in fact deposits with the same obligations of return the principal at par in the official currency, like banks. Without regulation, no one verifies if they do keep the assets and sufficient liquidity. So, accidents can happen 8/

Recently, e.g., Bloomberg reported that no one can find where are the assets behind Tether, one of the more popular “stablecoins”. Holdings of Tether amounted to 69 billion USD! bloomberg.com/news/features/… 9/

So, institutions that offer a deposit contract to their clients, do exactly what really defines a bank. A bank is not defined because it gives credit to clients. Fintechs that just do credit, like peer-to-peer lending or crowd-funding, cannot, and are not, compared to banks 10/

Some analysts defend that stablecoins are similar to money market funds (MMFs) and should be regulated as such, but I don’t think so. Old style MMFs, that guaranteed the value of their units at par, were in fact, as many have said, “banks without capital”. 11/

After some bailouts, the US new legislation transformed most MMFs into “variable value units” which pass to their clients the risk of losing money from lower valuations. These no longer get money from clients as something akin to a deposit. (There are other MMFs types) 12/

The US Treasury Report,lists the reasons why regulation like banks is necessary:“To address risks to..users and guard against stablecoin runs…concerns about payment system risk…concerns about systemic risk and concentration of economic power” home.treasury.gov/system/files/1… 13/

Systemic risk may come from bank disintermediation,i.e., deposit flight from banks.Banks are heavily regulated and that would be unfair competition by unregulated institutions doing the same. Banks are, btw, the only institution that offer maturity transformation 14/

Maturity transformation banks do, consists in offering short-term deposits and doing longer term loans. This function is crucial because most people want to maintain liquid deposits they can use immediately and the economy needs longer term credits for businesses or mortgages 15/

Stablecoins should be regulated as banks, but possibly in a lighter way, as they do not do much maturity transformation or other things that banks do. Regulators will face fierce opposition from the enthusiastic tech people who think that technology annuls financial risks 16/

There is much else to say about banks, MMFs and their various types, stablecoins and their variants, as well as about what they do, all the risks they incur into or that they can provoke. This thread only covers some of the basics on the regulators case. Read the Report 17/17