Introduction
Margaret Thatcher once said that the problem with socialists is that they eventually run out of other people’s money. But what happens when bankers face the same predicament, as seems imminent? We could be headed for another financial disaster or innovate to serve the public interest in a way Thatcher might have called socialist.
The Rise of Stablecoins
Stablecoins, unlike Bitcoin and other cryptocurrencies that are not pegged to any asset and fluctuate wildly, are issued by private companies promising their tokens will closely track the value of the US dollar. There are compelling reasons for anyone, not just criminals, to use stablecoins:
- They offer a cheaper, faster, more reliable, and sanction-resistant method of transferring money, especially abroad.
- Financial institutions can leverage stablecoins to streamline transactions involving stocks, bonds, derivatives, and other instruments on the corresponding blockchain, enhancing speed and reliability.
- If a particular stablecoin dominates the market, its issuer will control not only the market but also the currency used in transactions, creating massive potential for financial gains.
The Looming Financial Crisis
However, stablecoins are setting the stage for the next financial crisis:
- Stablecoin issuers have an incentive to issue more tokens than the dollars they hold in reserve, creating a ticking time bomb.
- If a significant portion of their dollar reserves is held in banks, a bank run will trigger a run on stablecoins, causing a chain reaction of bank runs.
- Moreover, the interconnectedness of stablecoins, stocks, and bonds forms a vicious cycle: moving financial operations to blockchain-lubricated stablecoins puts the stock market and the U.S. Treasury bond market (worth $29 trillion) at risk during a stablecoin run.
- Additionally, globally fragile stablecoins backed by dollars held outside the U.S. by companies unlikely to receive U.S. bailouts if needed further exacerbate the situation.
The US Senate’s GENIUS Act and its Implications
On June 17, the U.S. Senate passed the GENIUS Act, aiming to legitimize and encourage stablecoin adoption. Essentially, the Trump administration is privatizing the dollar system for geopolitical, ideological, and self-serving reasons. The U.S. Treasury predicts that $6.6 trillion in non-interest-bearing transaction accounts from U.S. commercial banks will migrate to stablecoins under the GENIUS Act, essentially placing a massive time bomb at the foundation of global economies.
A Proposed Solution: A Public Digital Wallet by the Fed
Imagine U.S. residents downloading a digital wallet from any app store, requesting salary payments in this wallet from employers, and transferring funds from commercial bank accounts to take advantage of the Fed’s interbank rate and free transactions.
Using the same blockchain technology as stablecoin issuers, the Fed would ensure complete privacy for each payment or transfer while making the total money supply in circulation transparent, preventing authorities from clandestinely creating new money.
- This digital wallet would be the mother of all stablecoins, without any of their drawbacks.
- It combines speed, efficiency, and privacy with a higher interest rate on deposits compared to commercial banks and official assurance that tokens are 100% backed by the Fed, avoiding the moral hazard and vicious cycle problems of private stablecoins.
- Furthermore, this public system offers an additional advantage: the creation of a universal trust fund.
Implications for the Global Monetary System
Under the current fractional-reserve banking system, commercial banks create multiple dollars for each deposit received, inflating the money supply (the “money multiplier”). If the U.S. Treasury is correct and $6.6 trillion in transaction accounts migrate from U.S. banks to stablecoins, the global dollar supply is about to implode, forcing the Fed to raise interest rates significantly to prevent a decline in monetary supply—disastrous for the real economy.
Alternatively, after a mass migration of bank deposits to Fed wallets, the Fed wouldn’t need to raise interest rates. It would only calculate the reduced money supply and credit each resident’s wallet with the necessary amount to maintain stable supply, effectively creating a substantial universal trust fund within this novel public cryptographic network functioning as an innovative monetary commons.
Key Questions and Answers
- What is the proposed solution? A public digital wallet by the Federal Reserve, leveraging blockchain technology to ensure privacy and transparency while offering higher interest rates on deposits and official backing.
- How does this solution address the risks of stablecoins? It eliminates the incentive for over-issuance, prevents bank runs from triggering stablecoin runs, and avoids the interconnected risks of stocks, bonds, and stablecoins.
- What are the benefits of this proposed system? It offers speed, efficiency, privacy, and a universal trust fund, all while maintaining monetary stability.
- Why might this proposal face opposition? Bankers will likely resist, as it removes their monopoly on payments and savings, forcing them to act as financial intermediaries by converting Maria’s savings into loans for Juan.
- How would financial markets adapt to this new system? They would use the Fed’s tokenized dollar for transactions but without the exorbitant rents they might have earned had they privatized tokenized dollars.
