In
a
recent
podcast,
Hilary
Allen,
a
law
professor
at
American
University,
painted
stablecoins
as
a
dangerous
threat
to
the
banking
system
and,
ultimately,
to
the
public
at
large.
In
her
view,
stablecoins
could
destabilize
banks
and
eventually
require
a
government
bailout.
Her
comments
come
amid
a
new
push
in
the
U.S.
Congress
for
regulating
stablecoins
at
the
federal
level.
Although
the
chances
of
any
stablecoin
bill
being
enacted
into
law
in
a
year
of
presidential
elections
are
slim,
Allen
is
concerned
that
these
bills
are
“giving
public
backing
to
stablecoins.”
For
her,
“stablecoins
serve
no
important
purpose
and
frankly
just
should
be
banned.”
Marcelo
M.
Prates,
a
speaker
at
Consensus
2024,
is
a
financial
policy
and
regulation
expert
writing
about
money,
payments,
and
digital
assets.
Are
her
concerns
valid?
Only
for
those
who
are
against
competition
and
don’t
like
regulatory
clarity.
What
Allen
depicts
as
a
scary
and
useless
fad
is
an
upgraded
version
of
one
of
the
most
revolutionary
financial
innovations
in
the
last
25
years:
electronic
money,
or
simply
e-money,
issued
by
non-banks.
In
the
early-2000s,
the
European
Union
decided
it
was
about
time
for
more
people
to
have
access
to
faster
and
cheaper
digital
payments.
With
that
in
mind,
E.U.
legislators
developed
a
regulatory
framework
for
e-money
and
allowed
start-ups
making
the
most
of
technology,
the
so-called
fintech,
to
provide
payment
instruments
in
a
regulated
and
safe
way.
The
idea
behind
it
was
simple.
As
banks
are
complex
institutions
providing
multiple
services
and
are
subject
to
higher
risks
and
increased
regulation,
opening
a
bank
account
to
make
digital
payments
was
usually
difficult
and
costly.
The
solution
was
to
have
a
separate
licensing
and
regulatory
regime
for
non-banks
focused
on
one
service:
transforming
cash
they
received
from
their
customers
into
e-money
that
could
be
used
for
digital
payments
either
through
a
prepaid
card
or
an
electronic
device.
In
practice,
e-money
issuers
work
like
narrow
banks.
They
are
legally
required
to
safeguard
or
insure
the
cash
they
receive
from
their
customers
so
that
e-money
balances
can
always
be
converted
back
to
cash
with
no
loss
of
value.
As
they
are
licensed
and
supervised
entities,
customers
know
that,
aside
from
gross
regulatory
failure,
their
e-money
is
safe.
It’s
thus
easy
to
see
that
the
vast
majority
of
existing
stablecoins,
those
denominated
on
a
sovereign
currency
like
U.S.
dollars,
are
just
e-money
with
a
kick:
as
they
are
issued
on
blockchains,
they
are
not
restricted
to
a
national
payments
system
and
can
circulate
globally.
Instead
of
a
scary
financial
product,
stablecoins
are
really
“e-money
2.0,”
with
the
potential
to
keep
delivering
on
the
original
e-money
promises
of
increasing
competition
in
the
financial
sector,
lowering
costs
for
consumers,
and
advancing
financial
inclusion.
But
for
these
promises
to
be
fulfilled,
stablecoins
do
need
to
be
properly
regulated
at
the
federal
level.
Without
federal
law,
stablecoin
issuers
in
the
U.S.
will
continue
to
be
subject
to
state
money
transmitter
laws
that
aren’t
uniformly
designed
or
consistently
enforced
when
it
comes
to
segregation
of
clients’
funds
and
integrity
of
assets
kept
in
reserve.
Considering
the
decades-long
experience
of
the
European
Union
in
e-money
and
improvements
brought
by
other
countries,
an
effective
stablecoin
regulation
should
be
built
around
three
pillars:
granting
of
a
non-bank
license,
direct
access
to
central-bank
accounts,
and
bankruptcy
protection
for
backing
assets.
First,
it’d
be
contradictory
to
restrict
stablecoin
issuance
to
banks.
The
essence
of
banking
is
the
possibility
of
holding
deposits
from
the
public
that
aren’t
always
100%
backed,
which
is
traditionally
known
as
“fractional
reserve
banking.”
And
that
happens
so
that
banks
can
make
loans
without
using
only
their
capital.
For
stablecoin
issuers,
on
the
other
hand,
the
goal
is
that
each
stablecoin
is
fully
backed
with
liquid
assets.
Their
sole
job
is
to
receive
cash,
offer
a
stablecoin
in
return,
hold
safely
the
cash
received,
and
return
the
cash
anytime
someone
comes
with
a
stablecoin
to
redeem.
Lending
money
isn’t
a
part
of
their
business.
Stablecoin
issuers,
much
like
e-money
issuers,
are
meant
to
compete
with
banks
in
the
payments
sector,
especially
in
cross-border
payments.
They’re
not
supposed
to
replace
banks
or,
worse,
become
banks.
That’s
why
stablecoin
issuers
should
be
granted
a
specific
non-bank
license,
as
happens
for
e-money
issuers
in
the
E.U.,
U.K.,
and
Brazil:
a
simpler
license
with
requirements,
including
capital
requirements,
that
are
proportionate
to
their
limited
activity
and
lower
risk
profile.
They
don’t
need
a
banking
license,
nor
should
they
be
required
to
get
one.
Second,
and
to
reinforce
their
lower
risk
profile,
stablecoin
issuers
should
be
able
to
have
a
central-bank
account
to
hold
their
backing
assets.
Transferring
the
cash
received
from
their
customers
to
a
bank
account
or
investing
it
in
short-term
securities
are
typically
safe
options,
but
both
can
become
riskier
in
times
of
stress.
Circle,
a
U.S.
stablecoin
issuer,
had
a
hard
time
when
Silicon
Valley
Bank
(SVB)
failed,
and
$3.3
billion
of
its
cash
reserves
(almost
10%
of
the
total
reserves)
that
had
been
deposited
with
SVB
were
temporarily
unavailable.
And
several
banks,
including
SVB,
that
were
holding
U.S.
treasuries
suffered
losses
after
interest
rates
rose
in
2022,
and
the
treasuries’
market
price
declined,
leaving
some
of
them
short
on
liquidity
and
unable
to
face
withdrawals.
Read
more:
Dan
Kuhn
–
What
Visa’s
‘Organic’
Stablecoin
Report
Misses
To
avoid
problems
in
the
banking
system
or
the
treasuries
market
spilling
over
to
stablecoins,
issuers
should
be
required
to
deposit
their
backing
reserves
directly
with
the
Fed.
This
rule
would
effectively
eliminate
credit
risk
in
the
U.S.
stablecoin
market
and
enable
real-time
supervision
of
stablecoins’
backing
—
no
need
for
deposit
insurance
and
no
bailout
risk,
just
like
e-money
and
contrary
to
bank
deposits.
Note
that
central-bank
accounts
for
non-bank
institutions
wouldn’t
be
unprecedented.
E-money
issuers
in
countries
like
the
U.K,
Switzerland
and
Brazil
can
keep
users’
funds
safeguarded
directly
with
the
central
bank.
Third,
customers’
funds
should
be
considered
by
law
segregated
from
the
issuer’s
and
not
subject
to
any
insolvency
regime
if
the
stablecoin
issuer
were
to
fail
—
for
example,
because
of
the
materialization
of
operational
risks,
like
fraud.
With
that
additional
layer
of
protection,
stablecoin
users
could
quickly
regain
access
to
their
funds
during
a
liquidation
process,
as
general
creditors
of
the
bankrupt
issuer
wouldn’t
be
able
to
seize
customers’
funds.
Again,
something
like
what’s
considered
the
best
practice
for
e-money
issuers.
In
the
public
debate
about
stablecoin
regulation,
alarming
takes
might
impress
a
distracted
audience.
But,
for
those
paying
attention,
balanced
arguments
based
on
successful
examples
and
experiences
from
around
the
world
should
prevail.