Wednesday, April 26, 2023

A quick defence of digital substrate agnosticism (or, why banks should be able to issue stablecoins)

In principle, I'm pro banks-issuing-stablecoins.

I think banks should be able to issue dollar IOUs on whatever digital substrate they see fit, whether that be an Azure SQL database, an Oracle database, or a blockchain. And they should be allowed to get deposit insurance for any of those dollars, regardless of the substrate on which those dollars are recorded. The medium should be irrelevant.

Banks should also be able to run their blockchain-based dollars on a fractional reserve basis, just like they already do with their Oracle and Azure-based dollars. That's right. Bank stablecoins shouldn't be required to operate on a full-reserve basis.

So when I see the following recently-announced initiatives, I sort of shrug and say, sure, that's fine. In Japan, three banks are going to test stablecoins while in Europe, Societe Generale wants to issue a stablecoin called EUR CoinVertible.

The Japanese example is notable, because it stems from recent amendments to Japan's Banking Act, the Payment Services Act, and the Trust Business Act allowing banks, fund transfer companies, and trusts to issue stablecoins.

Meanwhile, in the U.S., the Fed and its sister regulators have taken a different path than the FSA, recently suggesting that issuing tokens on a blockchain is "inconsistent with safe and sound banking practices." That doesn't mean that U.S. banks can't issue blockchain-based dollars, but I suppose it's a stern enough put-down that they won't ever bother.

I'm not a fan of the U.S.'s approach. Banking authorities don't say: hey, Bank of America, we'd prefer you use an Oracle database instead of an Azure one for your IOUs. Likewise, they shouldn't get to say: hey, Bank of America, don't use an Ethereum database instead of an Oracle one.

Mind you, unlike the crypto idealists, I don't think blockchains are the revolution that they are often made out to be. They're just another database, one with some quirky characteristics, so let banks figure out on their own whether they are a worthwhile medium or not. There's a high likelihood that blockchain-based dollars won't be successful with customers, but banks won't really know until they experiment.

One last point on this topic. In the same vein of substrate neutrality, if banks are going to use some sort of blockchain to issue dollars, they should be required to subject their blockchain-based dollars to the same anti-money laundering checks to which their non-blockchain based dollars are beholden. 

That means identifying all their users. This would be a departure from current practice among blockchain-based dollar issuers (like Tether and Circle) whereby they do KYC on just some users. A defence of substrate agnosticism suggests that the current KYC-lite touch isn't enough.


  1. Back in 1892, in Portugal, comercial banks had their own currencies. And one fine day, almost all went bankrupt, in what became a major finantial crisis. There were no computers back then, so money was physical paper bills and coins. Overnight, all that became worthless paper, good to burn in the fireplace. Afterwards, comercial banks did not issue any more private currency. Only the central bank could issue the bills and coins. A bank can go bankrupt, and depositors might loose their savings (there is deposit insurance to a certain value anyway), but if you have money under the mattress, it will still be money tomorrow.

  2. Michael at Hastings
    The national bank says "I will promise to pay" then that is IT
    The national bank resource is the security. gold maybe

    Fly by night digital promiises don't seem to be a common sense way of behaving. Maybe I'm out of touch with reality. Question: Am I ?

    Love you all from us at Hastings UK