Are StableCoins A Clear and Present Danger?

Joe Biden thinks so

Looking at the recommendation from the President on stablecoins shows me that they are going to regulate them come hell or high water. I don’t agree with that sort of threat.

The first misnomer that I stumbled upon was the rationale for the growth of the stablecoin sector. The President’s working group pointed the finger at people who were paid to pump up the sector and advise the sector. I think the opposite. There was a need for the sector, and the sector saw the threat of regulation along with needing advice on how to structure and grow. They paid people to help.

Cryptocurrency didn’t just come out of nowhere. It’s here because there is a need for it.

Cryptocurrency and offshoots are a result of terrible government policies regarding fiscal spending, money creation, and regulation which incentivizes big centralized industries.

Anti-Capitalists chide everyone saying markets are broken and capitalism cannot fix them. Cryptocurrency is the antidote and flies in their face. One example, Filecoin is building out a competitive network for cloud storage. The cloud storage oligopoly will have to compete with Filecoin when it is fully loaded. Hint: based on the verbiage coming from the current administration, they aren’t in favor of free-market capitalistic competition.

For those that don’t know, what is a stablecoin? It’s supposed to take the volatility out of holding cryptocurrency. They are used to facilitate trading, lending, or borrowing.

The Fed sees risks all over the place.

Of course, in the entire 26 page report they only say there are risks, they don’t specifically outline them. There are risks with using the traditional financial system too.

I just wired money from one account to a third-party bank to make an investment. It took three days. There were multiple phone calls between parties to make sure there was no fraud. There are billions of dollars of fraud each year in the traditional payment system. Russian czars and Nigerian princes benefit.

Are there problems with stablecoins? Yes. It’s not clear that the stablecoin Tether has been totally transparent about its holdings.

Rules or regulations that create accountability and transparency can be very beneficial to stablecoins. However, charging Congress with the responsibility and saying if they don’t, the agencies will is the wrong approach. Congress can’t begin to wrap their heads around crypto, and given the hyper-politicized environment, do you think they can even do a decent job? The agencies are probably worse.

The best way to regulate is via a private regulator that has teeth. This is similar to what the futures industry did back in the early 1960s with the National Futures Association. A few other industries have done the same.

Another parallel is the OTC derivatives industry. In the 2000 Commodity Futures Modernization Act, derivatives that were done privately were under a massive threat. One ruling by an uninformed judge could have wiped out the entire industry. A stroke of pen by a hyperactive regulator could have crushed trillions in notional value of private contracts between parties that knew what they were doing.

Remember, Coase theorem works and I think even though crypto is new, Coase holds.

The only thing the stablecoin sector is a clear and present danger to is existing banking and payment systems and it might be dangerous to people who invest in them. Federal regulators take their marching orders from who? Federal regulators are not some King Solomon that split babies and rule objectively. Unfettered and competitive free markets are better angels than regulators.

I think if the Feds get involved, they need to be very very limited in what they do. Any stroke of the pen is liable to create winners and losers. Crypto is still in early innings. As my friend Professor John McGinnis observed, “Will the State objectively regulate cryptocurrencies when cryptocurrency has the ability to topple one of the State’s greatest powers, money creation?”

My bet is no.